Fitch Ratings yesterday assigned stable credit outlook to construction and property corporates in the GCC and expects them to continue generating sufficient operational cash flow to support upcoming debt maturities in the short to medium term.
The global ratings agency said the extent and severity of the property market slowdown will vary from one GCC state to another.
In addition, the majority of Fitch-rated issuers in the region are either fully or partially owned by governments and are likely to be able to rely on support from their respective sovereigns if required. Relevant issuers' ratings could thus be revised if a sovereign's rating changes.
Considerable wealth has accumulated in the region in recent years due to high oil prices and favourable economic conditions, but the now weaker global economic environment and significantly lower oil prices are expected to lead to a slowdown in the very rapid growth that GCC economies and their construction and property sectors have experienced in the past several years. The construction and property sector appears increasingly negative as economic conditions worsen, demand for construction and property falls and access to finance remains difficult.
"The GCC is experiencing a property market slowdown to varying degrees, with property demand and prices declining and increasing customer delinquencies. On the financing side, corporate funding options remain limited and residential mortgage lending has become more restricted," said Bashar Al Natoor, Director in Fitch's Industrial rating team.
"All these factors are causing a weakening in construction and property sector profitability and capitalisation. These effects have been particularly notable in Dubai."
Corporates with negative free cash flow and a reliance on short-term debt may have an imminent liquidity problem if headroom under bank lines is insufficient or their relationship banks are capital constrained.
Corporates that did not access the bond market in the past two years may be forced to accept potentially higher funding costs going forward.
The prospects for bond/sukuk issuance will likely remain limited until at least second half of 2009.
Fitch believes that the sector can conserve cash by curtailing development plans and notes that key developers in Dubai have started to delay or cancel selected projects. Projects already under construction are expected to continue being built out until early 2010.
However, if evidence emerges that the current downturn is significantly more severe than anticipated, this could result in negative pressure on issuers' credit profiles.