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Off the Record: GCC CFOs and Treasurers See Big Changes in 2017

Many column inches have been filled with talk of low oil prices, liquidity, and budget deficits in the GCC, but how are these challenges affecting borrowers? Bonds & Loans spoke to more than 20 CFOs and Treasurers at GFC Media Group’s Bonds, Loans & Sukuk Middle East Conference in Dubai to get a sense of how their funding strategies have evolved against this backdrop.

May 24, 2017 // 1:42PM

A brief summary of some of our top three findings below.

Liquidity is Ample for Some, not Others

With the broad oil price uplift through 2016, banking liquidity has improved in the GCC this year, particularly in regions that depend more heavily on oil and gas – Saudi Arabia and Abu Dhabi, for instance. Bank deposits are rising in most jurisdictions, which has eased pressures on loan to deposit ratios.

But when it comes to banking liquidity and its impact on borrowers, it is important to make a distinction between entities that carry a high investment-grade rating, or operate under the umbrella of government organisations, and purely commercial medium and large enterprises that fall lower down the credit grade spectrum; lenders in the region have, broadly speaking, increased bilateral lending – but largely to the former group of entities.

For them, loan pricing has dropped anywhere from 50bp to 100bp depending on the size of the transaction compared with just 12 months ago; for lesser-known or smaller commercial entities, particularly those without long-term visibility on cash flows, the credit environment has stagnated, with many smaller entities remaining locked out of the loan market.

Overall, most said international lenders have become much more selective over the last 12 months, a shift driven in part by modest deterioration in credit quality coupled with increasing regulatory pressures on capital.

It is Unclear Whether the Shift to Bonds Will Last

The biggest shift has been seen in the region’s participation in international bond markets, which has been dominated by the region’s sovereigns and financial institutions, forming a credit pipeline which has – for the first time – seen loan volumes bested by bond issuances.

Interestingly, despite sovereigns and FIs paving the way for the region’s borrowers, and despite strong liquidity in emerging markets, about two thirds of the 12 CFOs / Treasurers working in highly-rated entities that plan to borrow this year said they were unlikely to issue bonds, mostly due either to deal size limitations or pricing.

All of the private sector corporate CFOs / Treasurers that have not yet secured a rating or issued a bond in the international markets said it was either unlikely or highly unlikely that they would tap the market this year despite more favourable pricing and an upward interest rate trajectory in the US. That said, it is possible we could see the region’s broader shift from loans to bonds stall or reverse as we move through 2017.

A Corporate Finance Culture Shift – Particularly for Family-Run Businesses

The vast majority of entities we engaged with have implemented moderate to substantial cost rationalisation programmes over the past 12 months in a bid to reduce operating costs and drive bottom-line growth. For many, this has been a painful (albeit necessary) exercise, but it has had a broader positive influence in corporate finance culture – particularly for family-run businesses.

In a bid to bolster financial reporting, gain better visibility on cash flows, and improve access to funding, a number of the region’s entities have adopted more rigorous internal accounting standards and more robust treasury management processes. The shift has been most pronounced among the region’s family-run businesses. This has been driven in part by increasing pressure from lenders, which historically – when liquidity in the banking sector was particularly abundant – overwhelmingly lent to many of these entities on the basis of the family’s reputation (among other things, of course). This has changed drastically over the past 12 months.

With lenders now under more pressure than ever to scrutinise asset quality and their clients’ operations, many of the region’s family run businesses – which from an actuarial perspective, historically, have been regarded as “black boxes” – have been forced to adopt more sophisticated treasury management and accounting practices, improve governance, and become more transparent.

While this has produced many of the corporate challenges one would associate with this kind of transformation (personnel and organisational change, new IT infrastructure costs, etc.), all of the CFOs and Treasurers who spoke with Bonds & Loans said this culture shift is both necessary and positive overall, resulting in better-run organisations and stronger balance sheets. 

Middle East Macro CFO Insights CEE & Turkey CEEMEA

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