The GCC corporates hoping for a turnaround in 2020 outlook may have to wait little longer as the latest report from Moody’s Investors Service indicates further deterioration of credit conditions in 2020.
Moody’s Investors Service said its 2020 credit outlook for the GCC non-financial corporates has turned negative from stable. ‘The credit conditions [for GCC corporates] will deteriorate because of volatile oil prices and low non-oil GDP growth,’ the ratings agency said.
The report explained that muted economic growth, heightened geopolitical risks and policy unpredictability are the main drivers of Moody’s negative outlook for GCC corporates.
Cautioning corporates about the softening of global crude prices, Moody’s said that highly rated companies with significant domestic exposures could become constrained by weakening sovereign credit quality in the region.
Revealing about the drivers of negative outlook, the ratings agency said, low non-oil GDP growth and heightened geopolitical tensions weigh on investor sentiment and consumer confidence. The report also indicated that the governments in the region didn’t have much capacity to boost expenditure to support economic growth. ‘Volatile oil prices limit governments’ ability to fund growth initiatives,’ it added.
Moody’s warned that the overall economic growth in the GCC will remain slow in 2020 as a result of oil production cuts in response to weak global oil demand and expected production increases outside OPEC. It expects Brent crude oil prices will remain volatile within the US$55-US$75 per barrel range in 2020.
Besides this, geopolitical tensions following the probability of escalation of tension with Iran will also weigh on investor sentiments and consumer confidence.
Moody’s said that the construction and real estate sectors and retail companies will continue to suffer from oversupply in the GCC next year. And a slowing electricity demand will support the free cash flow of utilities as a result of lower investment needs.
The ratings agency said that the GCC telecom sector is likely to grow in 2020. ‘Telecom sector’s growth will be driven by entry into 5G technologies and business-to-business (B2B) services.’
On positive side, the report indicated that higher commitment on spending by the governments might provide some support to economic growth, which can also potentially change outlook to ‘stable’ in future.