Tension unlikely to impact credit ratings
The rising geopolitical tensions between the US and Iran since May 2019 is unlikely to lead to any change in the credit ratings of regional sovereigns, corporate or infrastructure debt issuers, according to credit rating agency Standard & Poor’s (S&P).
“The increase in tensions between the US and Iran since May 2019 has not led us to change any ratings or outlooks on corporate or infrastructure issuers we rate in the Gulf Cooperation Council (GCC) region. This is because, under our base-case scenario, we do not expect direct military conflict between the two countries or their regional allies, and we believe that the Strait of Hormuz will remain open to the global oil trade,” Timucin Engin, an analyst at S&P wrote in a recent note.
Under a hypothetical modest stress scenario the rating agency expects to see some pressure on revenue generation and access to liquidity for certain industries, but they expect any negative rating pressure to be limited. However, under a more severe hypothetical stress scenario, which analysts believe is quite remote, they would expect
to see more pronounced rating actions in our portfolio.
Currently S&P rates 37 public corporate issuers and infrastructure transactions in the GCC. The outlook is stable on 33 of them, while they have negative outlooks on three entities, and one issuer is on Credit watch with negative implications.
“While we don’t expect the current geopolitical tensions to lead to any rating actions under our base-case scenario, we do expect corporates in some sectors to face some operating weakness arising from the geopolitical tensions. As we expect the Strait of Hormuz will remain open under our base case, we expect the operating conditions in the oil and gas sector to remain largely unchanged,” said Tommy J Trask, an analyst at S&P.
Despite the limited direct impact of the stress situation on corporates, the heightened geopolitical tensions is likely to adversely impact investor confidence. “The role of international investors is quite important for key real estate markets, such as Dubai, and the heightened geopolitical risk is not supportive of investor sentiment,” S&P said in a note.
Real estate prices in the region have already been on a downward trend for the past few years. Similarly, a prolonged period of heightened geopolitical risk in the region is likely to have revenue implications for the region’s tourism and retail industries. Given the more stable nature of the telecom and utilities industries, analysts do not expect any meaningful change in their operating conditions.
Under the second, more severe hypothetical scenario that envisages the Strait of Hormuz being closed for an extended period, which S&P analyst believe is quite remote at this time, they expect more pronounced negative ratings actions. This could be triggered by potential negative sovereign rating actions as well as the deterioration in the stand-alone performance of the companies. “Of the sectors we focus on, the most at risk of weakening stand-alone creditworthiness would be oil and gas, petrochemicals, and real estate,” said Engin.
Currently 33 of the 37 public corporate issuers and infrastructure transactions in the GCC rated by S&P have stable outlook, while three have negative outlooks and one on credit watch.
Experts believe the tanker seizures could create “a real risk premium” for companies that operate in the Gulf and insurers that underwrite them.