Gulf companies, which need to refinance $35-$40 billion in debts this year, are likely to face a further decline in credit quality as the region suffers from global turmoil, Moody's Investors Service said

The ratings agency said Dubai was "particularly vulnerable" because its key sectors -- real estate, tourism, trade and financial services -- are closely linked with developments in the global economy.

"Overall credit quality in the region has declined, and is likely to continue to do so going forward," Moody's said in a report.

An economic boom in the world's biggest oil-exporting region came to an end late last year as the global financial crisis worsened, oil prices collapsed and credit markets tightened.

Dubai's real estate sector is facing a sharp price correction and hundreds of billions of dollars of construction projects have been cancelled in the UAE as a result of the economic slowdown.

"It is important to bear in mind that the Gulf has never before been financially tested on such a large scale," Moody's said.

"Dubai in particular faces an unprecedented level of contingent government liabilities, that call into question less so its willingness, but its ability to support its flagship corporates in the event of such a requirement."

Dubai's mostly government-linked issuers will have to refinance about $15 billion before year-end, compared with about $5 billion in the rest of the UAE and $15-20 billion in the rest of the Gulf.

"Addressing these maturities will be a significant challenge, although we do expect liquidity to return to the markets as 2009 progresses, and bond spreads to recede from some of the panic-stricken levels seen in the second half of 2008," Moody's said.

About 94 percent of all rated corporate debt in the Gulf is with government-related issuers, it added.

Abu Dhabi this month said it was injecting 16 billion dirhams ($4.36 billion) into five of its banks, a move that called into question whether similar steps would take place in Dubai -- and could affect future credit ratings by Moody's.

"If a trend of selective treatment within the federation becomes discernible, Moody's stands ready to reduce its high support assumptions for banks and government-owned companies in other emirates outside Abu Dhabi," it said.

The cost of insuring Dubai's debt with credit default swaps has widened in recent months as investors doubt whether the emirate will be able to repay massive debts it took on to finance expansion projects during a six-year economic boom.

The Dubai government would likely be called upon to support immediate refinancing of around $15 billion of $70 billion in total debts this year, Moody's said.

Total rated corporate debt in the Gulf amounted to $20.4 billion at the end of 2008, including 90 percent by UAE issuers with Dubai alone representing 51 percent. Most of Abu Dhabi's 39 percent is with Abu Dhabi National Energy Co.

"Companies will have to accept far more expensive funding going forward in return for better long-term liquidity," Moody's said.

The credit ratings agency added it would monitor companies that have made acquisitions in the energy sector to see if they needed to be revised. -Reuters