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Business cycle to take several quarters to recover, says S&P

2 Feb 2021

The business cycle in Oman and other GCC countries is likely to take several quarters at least to fully recover from the economic recession triggered by the COVID-19 pandemic and low oil prices, S&P Global Ratings said on Tuesday.

After a very challenging 2020, S&P expects GCC economies to grow moderately this year and pressures to continue in corporate sectors, particularly for companies operating in tourism, aviation, real estate, and non-food retail. 

‘The same is true also for the larger oil, gas, and commodities sectors – including oil field services – because we expect revenue generation to remain under pressure relative to 2019,’ it said in a report.

Given the negative operating outlook, S&P said it expects most corporates in the GCC countries to maintain conservative strategies in 2021. 

‘The business cycle is likely to take several quarters at least to fully recover. Absent a substantial recovery in revenue generation, corporations are likely to focus on cost optimisation, proactively managing their liquidity, and preserving their cash flows, while new investments will continue to take a back seat in most sectors.’

Most GCC corporates endured visible stress on their revenue and earnings generation in 2020. Their priority this year will be to recuperate 2020 losses while operating in a slow-growth environment, the ratings agency said.

‘We expect most companies will face revenue-growth challenges in 2021 amid a lack of visibility on the timing of a recovery and COVID-19-related uncertainties. A significant number of rated corporates reduced or deferred their capital expenditures in 2020. Some, such as real estate, reduced and/or eliminated dividends to conserve cash. Some companies are also monetising assets to reduce their leverage. We expect these trends to continue through 2021,’ S&P said.

The ratings agency expects that a full recovery in the global aviation and tourism industries will take time; hence these sectors remain most exposed. ‘While there is considerable uncertainty regarding the outlook for global air travel, we nevertheless expect a weak recovery in 2021, with traffic and revenues still 40-60 per cent lower than in 2019, and 20–30 per cent lower in 2022. Therefore we expect the pressures on the region’s aviation and tourism sectors to remain in place,’ it added.

S&P further said ‘the worst may be behind us’, but expects economic pressures to continue and recovery to be slow and gradual. After suffering a major contraction in 2020, it estimates an aggregate real GDP growth of just 2.5 per cent in the GCC economies between 2021 and 2023.

‘While we expect economic growth to gradually recover, we think the size of the economies of most sovereigns in the Gulf region will still remain below their 2019 levels by 2022. As a result, GCC corporates are likely to continue to face broad-based pressures,’ the agency added.

According to S&P, most national oil companies and oil majors continue to focus on cost optimisation, renegotiating their contracts and pricing agreements, and generally limiting capital expenditures, which means continued revenue generation pressures for the oilfield services companies.

In the face of continued negative investment sentiment, S&P said it expects demand for real estate to remain subdued in the region.

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