GCC subsidy reform will strengthen utility sector's credit: Moody's

Published March 30th, 2016 - 10:00 GMT
Moody's said Oman currently has the highest subsidies for residential consumers of electricity and Dubai has the lowest based on the actual cost per kilowatt hour (kWh). (File photo)
Moody's said Oman currently has the highest subsidies for residential consumers of electricity and Dubai has the lowest based on the actual cost per kilowatt hour (kWh). (File photo)

GCC utilities could face a number of short-term challenges due to governments' reforms of energy subsidies in the region, but subsidy reforms are credit positive for the utilities sector in the long-term, according to Moody's Investors Service.

The ratings agency, in a report, said GCC governments’ reforms of energy subsidies, including for electricity and water, will likely result in the strengthening of the utilities sector’s standalone credit quality.

“The low oil price environment could potentially lead to utilities facing higher funding costs in the future if bank lending were to become constrained. However, it is also add momentum to existing efforts that are likely to improve GCC utilities' standalone credit quality over time,” Moody's analyst Julien Haddad said. 

According to Moody’s, unbundled distributors will benefit the most from the increases in tariffs in the short-term. “Distribution companies in unbundled systems, such as those in Oman, will gain from the reduction in subsidies to end-consumers as their revenues are directly linked to tariffs. Fully integrated utilities will also be positively affected. For other rated players, the effects will be credit neutral.”

Moody's said GCC utilities have been implementing measures, such as reducing system losses, to increase their operating efficiencies, reflecting the need to decrease operating expenses and improve profitability metrics.

“We expect firms to benefit from greater operating efficiencies, which along with the tariff hikes could lead to a rationalisation of power consumption in the region and enable companies to enhance their capital expenditure planning,” Haddad said.

Moody's said Oman currently has the highest subsidies for residential consumers of electricity and Dubai has the lowest based on the actual cost per kilowatt hour (kWh).

The ratings agency noted that improvements in operational efficiencies have substantially reduced power system losses in Oman. “Oman has already made progress in this area. According to Oman's Authority for Electricity Regulation (AER), system losses have decreased significantly for the main integrated system (MIS) since the restructuring of the sector in 2005.”

Moody's said, in Oman, technical and non-technical losses fell to 11.6 per cent in 2014 from 24.6 per cent in 2004, with the objective of cutting these losses to nine per cent by 2017.

Moody's said oil prices are unlikely to shift significantly in 2016 from their early 2016 levels and will remain below GCC budgetary break-even points.

“We think recent reductions to energy subsidies are likely to be followed by further cuts ahead of their potential phasing-out over the long term as the actions governments have taken so far to address the damaging effect of low oil price fall short of the scale of economic and fiscal reforms required to achieve budget balance,” Haddad said.


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