Weak corporate governance persists in Gulf but SABIC takes place in sun

Author: RICHARD WACHMANThu, 2017-11-16 03:00ID: 1510779490414806200LONDON: Weak corporate governance is still prevalent among Gulf companies, with the lack of progress viewed as “a step back” for regional countries, according to a report published on Wednesday.
Credit ratings agency Standard & Poor’s said only two companies had bucked the trend by posting significant improvements since 2012: Saudi Basic Industries Corp. (SABIC) and Majid Al-Futtaim Holding (MAF).
S&P said: “We assess SABIC’s management and governance as strong because management has a track record of leadership and delivering revenue and profit growth based on the successful execution of its sizeable investment program over the past decade, while adhering to a conservative financial policy.”
But the wider picture in the Gulf Cooperation Council (GCC) was less bright.
Although corporations in the region recognized that strengthening governance practices could improve their access to capital markets and cut the cost of raising debt, standards “still lagged those of corporations globally,” S&P said.
“Just 6 percent of the GCC corporations we rate have ‘strong’ management and governance scores, compared with 9 percent in Europe, the Middle East, and Africa as a whole. Moreover, scores for GCC companies were weak even when compared with those of similarly credit-rated companies worldwide.”
Poor governance could deter international investors from looking for opportunities in the region, said the report. Potential investors face closely controlled company ownership, a general lack of transparency, and the vagaries of individual states’ jurisdictions with respect to creditor protection. “This leaves them open to the risk of weak management and, in extreme cases, fraud,” said S&P.
Meanwhile, excess liquidity led some government-controlled organizations in the past to invest opportunistically in promising projects and investments at home and abroad, sometimes without adequately recognizing the risks involved, the S&P report said.
Government control of Gulf companies could render them susceptible to decisions being made in the interests of government policy and not of minority shareholders or creditors, although there were benefits linked to government ownership, such as access to funding on favorable terms and the potential for government support in case of need, said the report.
S&P also looked at the Gulf real estate sector and found Qatar badly hit by the standoff between Doha and some of its Arab neighbors. According to DTZ, residential rental rates in Qatar have declined 10 to 20 percent year-on-year.
The severing of trade and transport ties with Qatar has led to a fall in tourist and business travelers; retail sentiment in the country was poor and consumer spending had dropped “and may further decline as a result of lower tourist arrivals, especially from Saudi Arabia,” S&P noted.
Despite uncertainties within GCC countries, capital market issuance of bonds and other debt instruments were climbing rapidly, said S&P, forecasting that corporate and infrastructure capital-market activity was set to more than double from 2016.
S&P Global Ratings saw an emerging trend in budget-constrained governments increasingly looking to their government-related entities to tap capital markets for corporate and project bonds to complement record sovereign debt issuance.
Two recent examples were Abu Dhabi Crude Oil Pipeline (ADCOP) issuing $3 billion of project bonds and Nogaholding issuing $1 billion of bonds. “With government budget deficits remaining substantial, we expect this trend to continue into 2018,” said S&P.
It added that the Qatar trade embargo had resulted in downgrades of one or more notches and negative CreditWatch placements or outlooks on all rated corporates in that country.
Main category: Business & Economy

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