Stable outlook for GCC construction and property corporates in 2009; slowdown growing concern, Fitch reports

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.

Bashar Al Natoor, Director in Fitch's Industrial rating team, said:

"The GCC region 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."

"All these factors are causing a weakening in construction and property sector profitability and capitalisation. These effects have been particularly notable in Dubai," he added.

As a result of the global economic slowdown the region is facing mounting challenges which could further impact the already slowing regional property market. Liquidity has tightened across the GCC following the withdrawal of foreign deposits mainly speculating on a currency revaluation and the rapid fall in oil prices. This has already placed pressure on liquidity and is leading to higher funding costs. 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 last 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 H2 2009.

Fitch's broadly stable credit outlook also reflects that construction and property corporates should continue to generate sufficient operational cash flow to support upcoming debt maturities in the short- to medium-term. The sector can conserve cash by curtailing development plans and Fitch 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.

In December 2008, Fitch downgraded Dubai Holding Commercial Operations Group LLC's (DHCOG) Long-term Issuer Default Rating (IDR) and senior unsecured rating to 'A+' from 'AA-' (AA minus), respectively. DHCOG's Short-term IDR was downgraded to 'F1' from 'F1+', the Outlook for the Long-term IDR is Stable. The downgrade reflected the worsened economic outlook for Dubai. DHCOG's ratings are largely explained by the company's strong link to the Dubai government, its ownership structure and strategic position in the development of Dubai. Also in December, Fitch placed Dubai-based Gulf General Investment Company's (GGICO) Long-term IDR and senior unsecured ratings of 'BBB', on Rating Watch Negative (RWN). The RWN reflects Fitch's concern over the diversified industrial group's liquidity position, exposure to the local stock market, high level of short-term debt and vulnerability to the slowdown in Dubai's residential property market.