(MENAFN - Khaleej Times) Standard & Poor's, a leading global rating agency, said that the Dubai government has "a clearer strategy and greater confidence" on which government related entities, or GRES, it should support with public funds.
Ratings agency, which last week rendered a blow to emerging Asian economic powerhouse India by projecting a negative outlook on its economy, said "market confidence in the Dubai government's ability to support remaining GREs in need has increased, in our opinion, given the track record of recent successful restructurings and the government's issue last week of a 1.25 billion sukuk.'
Positive projections on Dubai is in sharp contrast to its earlier outlook on the emirate given in December 2011, when it warned that Dubai GREs are "up against significant risks, although the Dubai economy is beginning to bounce back."
Analysts said S&P's rising optimism in Dubai is a signal that the emirate has overcome most of the challenges it had to face in the aftermath of the global financial crisis.
S&P said in its report card "High Oil Prices Are Widening The Gap Between Gulf Oil Exporters And The Region's Other Economies" that as fears of political instability fan the Gulf, high hydrocarbon prices are continuing to underpin the economies of oil exporters Saudi Arabia, Kuwait, Qatar, the UAE, Oman, and Bahrain.
"Oil-rich economies in the Gulf are increasingly pulling ahead of the region's other economies, on the back of continuously high oil prices and the high prices support ratings across a range of corporate and infrastructure sectors, including oil and gas up- and downstream as well as sectors relying indirectly on commodity led growth such as trade," said S&P's credit analyst Tommy Trask.
The report noted that outside the oil sector, tourism and trade volumes have risen in the UAE, benefiting from the slackness in commercial and tourism hubs such as Bahrain and Egypt, where the Arab Spring protests have taken their political and economic toll.
"The region continues to progress in the restructuring of companies, predominantly GREs, that piled up hefty debt in order to make foreign investments during the boom years," it said.
S&P observed that the UAE Central Bank's recent amendment to tighten exposure limits for banks to local governments and public sector entities could curb lending in this segment, though, since some banks may already exceed the exposure limits.
Moody's Investors Service in a recent observation said while bank-lending growth in the UAE was to remain subdued, banks had increased their capital over the past two years, and the system average Tier 1 for year-end 2010 was 14.3 per cent.
Moody's also considers the UAE banks' liquidity metrics to have significantly improved, a trend that has been reinforced by progress in liquidity risk management at many UAE banks.
UAE Central Bank Governor Sultan bin Nasser Al Suwaidi has repeatedly said in the past that the UAE banks have enough liquidity to meet the local market's demands and that they are not exposed to eurozone debts. However, despite some recovery, bank lending remains sluggish.
S&P said regional bond prices have remained highly volatile over the past six months, but bonds have been trading tighter in the past three months on general optimism in global financial markets. Consequently, more Gulf issuers are tapping the international capital markets to raise funds.
"We see the trend in rising capital market issuance as generally positive for credit quality since it has the potential to derisk balance sheets of issuers that have tended to rely heavily on short-term financing from local banks," added Trask.
S&P credit analyst Karim Nassif said although the region's banks may be less inclined to grow their balance sheets, "we think government-related entities continue to have good access to bank funding and infrastructure entities such as Taqa and Saudi Electric have successfully raised Islamic financing internationally, which has supported capital spending and debt refinancing efforts."
The ratings agency said contrary to market expectations, GCC banks were generally able to issue substantial amounts of long-term bonds in the first quarter of this year. "That said, we believe some of the region's banks are now less inclined to grow their balance sheets, given some uncertainty about access to wholesale funding and the potential direction of nonperforming loans and loan provisioning."
The report card observed that regional equity markets have also recovered some ground over the past six
months, following trends in global markets, which is positive news for investment companies.
