Ratings pull region into the real world

08 March 1996

IF anyone was expecting a quiet time in Middle East finance, the first few weeks of 1996 will have quickly dispelled their illusions. Since the start of the year, the Gulf states have received their first-ever credit ratings from US agencies, regional banks have taken a leading role in a ground breaking $1,200 million package for a private petrochemical project in Kuwait, and some of the biggest international banks have announced plans to develop their presence in the Gulf and beyond.

The flurry of activity has tended to overshadow the steady stream of results issued since the start of the year. Few banks could claim to have performed remarkably, although most of them found conditions more agreeable than in 1994. The bond markets recovered their poise in 1995 as European and US interest rates fell, and share markets in London and New York rose strongly. However, most banks were cautious about expanding their investment securities portfolios, after being hit hard in 1994 when the bond markets took a tumble.

Most regional banks expect to experience moderate growth this year. The financial markets are expected to remain steady as there is no sign of an early rise in US and European rates. Attention is focused on domestic markets and banks are looking for a lift from lower interest rates. But government finances are still tight, particularly in the Gulf, dampening hopes of a marked improvement in the business climate.

Bankers say they are streamlining opera tions and developing the resources to meet what opportunities are emerging. At the top of the list is the growing demand for project finance, and developing the financial skills to meet this requirement. The year has brought an early success for a group of Gulf banks involved in the financial package for the $2,000 million Equate Petrochemical Company (Kuwait MEED Special Report, 23:2:96, page 13).

The financing was originally expected to come from the US' Export-Import Bank (ExIm Bank), but the final line-up was dominated by Gulf banks, with Ex-Im nowhere to be seen. The $1,200 million package was arranged by National Bank of Kuwait (NBK) and underwritten by 14 other institutions, of which 10 were regional or Kuwaiti. A further $200 million of financing is being underwritten by two Islamic institutions - - Kuwait Finance House and The International Investor - both Kuwait-based.

The financial advisors for the Equate project are NBK, JP Morgan and Chemical Bank.

The success of this deal has raised hopes that local banks will be able to play a bigger role in providing private financing for major projects. The next major project in the pipeline is Saudi Arabia's $1,500 million Ghazlan power station expansion which is seeking a loan of at least $500 million (MEED 1:12:95). A presentation of the project by its financial advisor, the Kuwait-based Gulf Investment Corporation.

held in Bahrain in early January, drew a strong response from both regional and international institutions.

On the horizon in Saudi Arabia is financing for national carrier Saudia, which is modernising its fleet and airport facilities at a cost of $8,000 million, and the kingdom's plans to develop the infrastructure in the main industrial cities of Jubail and Yanbu.

For the time being, international banks still dominate project financing in the region and are not giving any ground to their regional rivals. Since the start of the year, Barclays and Citibank have both announced initiatives to step up their Middle East activity. Barclays has taken on a former vicegovernor of the Saudi Arabian Monetary Agency as a senior advisor with the aim of building up its business in Saudi Arabia and the rest of the Gulf. Barclays is also launching a new investment bank, Middle East Capital Group, to be based in Beirut.

There has been a surge of interest in Lebanon and many banks are returning to reopen representative offices in Beirut.

Citibank will open an office for its global finance department in the Lebanese capital in late March or April, joining Banque Indosuez, ING Barings, Flemings, Banque Paribas and Merrill Lynch, among others. Elsewhere in the region, Citibank continues to build its treasury and foreign exchange business in Bahrain, and is committing new resources to its Cairo-based operation, becoming the first foreign bank to launch a bond on the local capital market, worth £E 200 million ($59 million).

Citibank is bolstering this network of regional offices and branches with plans to open a representative office in Israel which were announced at the start of February. It is the first US commercial bank to operate directly in Israel, which the bank says reflects the growing business interest in the country and the opportunities for economic relations with other Middle East states, such as Morocco and Egypt.

But it is the award of ratings for the Gulf states by Moody's Investors Service, followed by Standard & Poor's (S&P), that has made headlines in recent weeks. The US rating agencies have for the past 12 months made clear their plans for covering the Middle East region and Moody's has set up an office in Limassol to monitor the area.

At the end of January, Moody's took the unprecedented step of assigning sovereign ratings to the six GCC states. The move came as a surprise, not only because of the unimpressive ratings assigned but also because it was apparent that the governments of the countries concerned had not collaborated with the rating process. At the top of the list were Kuwait and the UAE, each with a long-term rating of Baal, followed by Oman with Baa2 and then Saudi Arabia with Baa3. All these ratings are above investment grade - a level which both Qatar and Bahrain failed to achieve.

Bankers have been quick to express concern. They say that without the co-operation of the governments there is not enough public information to make a fair assessment of any of the Gulf states creditworthiness. In addition, they say the ratings are undeservedly low, in particular for Saudi Arabia, which was just above the borderline between investment and subinvestment grade By issuing unsolicited ratings, Moody's may hope to encourage the governments to seek a higher grade by giving access to more information, bankers suggest. In the report that accompanied S&P's rating for Qatar, the need for more information was spelled out: 'A higher degree of disclosure and transparency on public finances could affect favourably S&P's opinion on Qatar's credit standing.'

S&P's ratings, which were only released for two countries, were distinctly different from the Moody's assessment. Qatar received a higher grade than Oman, and both achieved investment grade. Both ratings were also assigned and released with the full co-operation of the countries con cerned, which S&P emphasises as essential to their policy for assigning ratings.

Regardless of how the sovereign ratings have been received, the issue for banks in the Gulf is whether to go for a rating themselves. As traditional net placers of funds overseas, the banks have had little need for a rating.

However, the region is looking increasingly for new financial resources, and the flow of funds is reversing. This is an inducement for banks in the region to seek more ratings as most of them have only been rated by the Limassol-based Capital Intelligence, which was the sole rating agency to operate in the region until Moody's also moved to Cyprus.

Banks such as The Gulf Bank, Bahrain International Bank and Arab Banking Corporation are now starting to obtain ratings from the major international agencies.

Others are beginning to follow their lead:

'We have been approached by the agencies to do a rating and we have opened our books to them to do whatever they want to do,' says Abdulaziz al-Ghurair, chief executive officer at MashreqBank in Dubai. 'It's good for the public to know where we are.'

It is also part of the process that is drawing the Middle East more deeply into the increasingly globalised economy. 1996 is likely to be a busy year.

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