Encouraging for Middle East on credit rating, but as good a time as any for rethink

The credit raters, the institutions that governments (and some corporates) love to hate, have been busy in the region over the past couple of days, with both Moody's and Standard & Poor's coming out with detailed reports on most aspects of the Middle East's creditworthiness.
The picture that emerges is mostly benign. Against a background of renewed economic growth, and stable conditions in finance and banking, sovereign and corporate credit is once again on a growth path. Borrowers in the region, and especially the Arabian Gulf, are gearing up to finance long-term projects, like Qatar's staging of the Fifa World Cup in 2022 and Dubai's Expo 2020.
But there are hints, especially from Moody's, that in some parts, notably Dubai, the temptation to go on a new credit-fuelled spree could rebound as the legacy of the 2009 financial crisis is still being worked through.
S&P calculates that the sovereigns it rates in the region will borrow 27 per cent more this year compared to 2013, increasing their long-term debts to commercial lenders by US$56 billion to a total of $462bn. That reflects an improvement in the ratings, and therefore borrowing terms, of many governments and corporates, and a decline in the cost of insuring against default on debts: CDS spreads are at their lowest since the crisis in most parts of the GCC.
The financial system has largely recovered from the stresses of 2009, Moody's finds. The banks have resumed credit growth, although at lower than pre-crisis levels, and impairments levels are falling. Strong capitalisation and liquidity buffers, the region's traditional banking strength, have been enhanced by improving growth prospects.
At the sovereign level, Moody's reports that governments on the whole are lowly indebted. Even after the Arab Spring convulsions (which have inevitably affected the debt levels of energy-importing countries) most governments, especially in the GCC, have respectable levels of public sector debt.
There are some outliers, like Egypt, Morocco and Bahrain, but the picture that emerges is of governments getting to grips with debt. Long term, falling oil prices might affect that situation, but for the near term at least the outlook is stable.
One notable item to emerge from the Moody's report is that the region's sovereign wealth funds are back in growth mode. The SWFs reserve assets reached a staggering US$1.9 trillion by the end of 2013, up from $1.4tn during the crisis.
Figures from the Sovereign Wealth Fund Institute estimate the Abu Dhabi Investment Authority's assets at $773 billion, the highest for some time, while even Investment Corporation of Dubai makes the charts with an estimated $70bn of assets.
In other respects, however, Dubai is a special case within the GCC. Moody's notes the improved conditions in the emirate's economy: strong GDP growth at 4.9 per cent in the first half of last year; a 15 per cent jump in passenger numbers at Dubai International; sharply increased confidence among purchasing managers after the Expo 2020 decision last November; rising property value and private credit growth.
Moody's notes also that the first round of post-crisis debt talks have been successfully concluded with the deal between Dubai Group and creditors in January over the final $6bn tranche of crisis-related debt.
But there is a sting in the tail of the Moody's report. "The [Dubai] public sector remains highly leveraged, with the gross debt burden of Dubai Inc rising to $131bn in April 2013, according to the IMF, from $129bn in 2012", although noting that the direct obligations of the Dubai Government have fallen.
The investment required for the Expo will put a further strain on Dubai's debt position. The Government has announced it will foot the bill for $6.8bn of the cost, but estimates put the total cost of the Expo and other mega-projects at more than $40bn.
With $30bn of debt maturing this year (including $20bn to Abu Dhabi entities from the crisis period), Dubai needs a new long-term strategy for indebtedness. The emirate has shied away in the past from issuing government sovereign debt (although many of the elements of Dubai Inc have done so).
Maybe now is the time to rethink this strategy by seeking full credit ratings. Moody's and S&P would surely be happy to oblige.
fkane@thenational.ae
Follow us on Twitter @Ind_Insights