Many of the companies rated by Moody’s in the GCC area are in a good position to absorb the effects of higher interest rates, with  data showing that 67% are investment grade.

“They have strong balance sheets and have recovered from the aftermath of COVID-19, particularly in sectors such as oil and gas, chemicals and real estate,” Moody’s said in a sector in-depth update on Middle East Corporates. 

The ratings agency said while interest rates are rising general, including in the GCC, rate increases will lower interest coverage and decrease cash flows, which will lower companies’ ability to service and repay their debt.

But, there are some key differences between the region and other regions globally, in that the companies in the GCC have offsetting factors, including the predominance of investment grade ratings and strong support from the governments, Moody’s said.

“High oil prices are also beneficial for the economies in the region, in contrast to other countries that face slower economic growth because of higher energy costs,” the update said.

Almost two thirds of the debt on rated GCC companies’ balance sheets has a fixed interest rate because many rated companies regularly access global debt capital markets, which are predominantly fixed-rate markets, Moody’s said, adding that many companies accessed the market in 2020-21 when liquidity was high following the outbreak of the COVID-19 pandemic.

“Most of the debt raised had much lower interest rates than the current base rates set by the central banks in the region. In total, 45% of rated debt is due after 2026, and maturities until then are evenly distributed,” Moody’s said.

The agency said it expects investment-grade companies to maintain a very strong interest coverage ratios despite the increase in interest rates.

“This is because many of them have very little debt or have very strong cash flow generation, particularly those operating in the oil and gas or chemicals sectors.

“Those companies have benefited from the increase in commodity prices during 2021, which bolstered their cash flow generation quite significantly.”

Companies rated in the Ba and B categories will struggle the most because of higher interest rates, Moody’s said.

However, it was expected that interest rates will be partially offset by an improvement in their operating performance as their home economies benefit from higher oil prices, the report added.

(Writing by Imogen Lillywhite; editing by Seban Scaria)