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S&P says GCC firms to remain resilient amid slower growth

12 Mar 2023 S&P Oman growth By OUR CORRESPONDENT

Muscat – S&P Global Ratings foresees a resilient performance in 2023 among corporate and infrastructure companies in the GCC countries, despite higher interest rates and inflationary pressures.

However, S&P expects that higher interest rates and inflation, and less-accommodating debt capital markets relative to 2021, will represent some challenges for the GCC companies in 2023, alongside its expectation of slower economic growth.

‘Despite this, we still forecast resilient performance, given stable earnings profiles, strong balance-sheets, and healthy funding and maturity profiles. We therefore expect GCC corporate and infrastructure issuers to comfortably navigate through 2023,’ S&P said in its GCC Corporate and Infrastructure Outlook 2023 Report.

After a sharp recovery in 2022, the rating agency expects to see slower GDP growth among the GCC countries in 2023, largely because of OPEC-related oil production cuts. However, its oil price assumptions remain relatively high, with the Brent oil price averaging US$90 per barrel in 2023 and US$80 in 2024. Hydrocarbon prices in 2023 and 2024 should support intrinsic credit quality for the oil and gas sector in the region, it added.

‘As such, we do not expect a significant negative impact on non-oil GDP and corporate sector performance. We also expect some negative – but manageable – earnings impact from higher global and local interest rates, while inflation could affect profitability margins for some of the regional operators,’ S&P noted.

The rating agency said that most companies exhibit a balanced debt composition with about half of their funding exposed to floating interest rates, and the rest based on fixed rates. ‘However, a handful of companies have higher floating rate exposure, making them more vulnerable to further interest hikes, especially for those operating in cyclical industries that may suffer from economic headwinds.’

S&P said, ‘Rated GCC corporate issuers operate with healthy and stable revenue generation that should allow them to digest manageable increases in cost of funds as well as the impact of inflation on their margins, while their healthy maturity profiles should allow them to navigate through capital market conditions that remain less favourable than in 2021.’

Similarly, the rating agency said its rated infrastructure projects’ operational performances are expected to remain robust and to generate strong cash flow to fully service or repay all their respective senior debts.

As per S&P, GCC corporates’ operating performance accelerated in 2022 accompanied by positive rating actions, largely thanks to improvements in the regional oil and gas-based economies. In the meantime, some rated government-related entities also saw positive rating actions following similar actions on several rated sovereigns in the region.

‘As a result, 75 per cent of our rating outlooks are stable, while over 20 per cent are on a positive outlook, which reflects our expectations of resilience for the rated corporate and infrastructure issuers in 2023,’ S&P added.

The rating agency does not expect rated GCC infrastructure issuers to refinance their long-term debt given the high interest rate environment. ‘Similarly, we have seen a slowdown over 2022 for infrastructure first-time issuers, which we foresee recovering progressively over the course of 2023-2024 as long-term borrowing rates stabilize.’

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