GCC firms to remain resilient amid slower growth in 2023: S&P Global

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Corporate and infrastructure companies in the GCC countries are on track to maintain a resilient performance in 2023 despite soaring interest rates and inflation, less-accommodating debt capital markets amid continued bleak economic growth, analysts at S&P Global Ratings said.

Analysts at the US-based credit rating firm said they expect corporate and infrastructure issuers in the region to comfortably navigate through 2023 on the back of stable earnings profiles, strong balance sheets, and healthy funding and maturity profiles.

Analysts Timucua Engine and Rawan Oueidat noted that most GCC 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," they said.

While Opec-related oil production cuts will affect the region’s GDP growth, S&P analysts noted, oil price assumptions remain relatively high, with the Brent oil price averaging $90 per barrel in 2023 and $80 in 2024.

"Hydrocarbon prices in 2023 and 2024 should support intrinsic credit quality for the oil and gas sector in the region," said Oueidat.

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," added Sapna Jagtiani.

After a sharp recovery in 2022, S&P analysts expect to see slower GDP growth among the GCC countries in 2023, largely because of Opec-related oil production cuts. However, oil price assumptions remain relatively high, with the Brent oil price averaging $90 per barrel in 2023 and $80 in 2024.

“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.”

An International Monetary Fund staff report recently observed that primary fiscal balances of Gulf countries are expected to average 25 per cent of their gross domestic products during the 2022-2026 period as they contain expenditure.

“Liquidity and fiscal support above or comparable to what was provided by most emerging economies, successful vaccination campaigns, reform momentum and recovery in oil prices and production — in line with Opec production agreements — have helped GCC countries to recover swiftly and move to a more sustained growth,” the report said.

The total economic output of the countries in the bloc is projected to reach $2 trillion in 2022, the IMF has said in its Gulf Economic Outlook. If the Gulf countries continue business as usual, the region’s combined GDP will grow to $6 trillion by 2050. That figure could shoot up to more than $13 trillion by 2050 if they adopt a green-growth strategy that accelerates economic diversification, the lender said.

Sofia Bonsai said S&P’s 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.

"We do not expect rated infrastructure issuers to refinance their long-term debt given the high-interest rate environment," noted Bonsai.

"Similarly, we have seen a slowdown over 2022 for infrastructure first-time issuers, which we foresee recovering progressively over the course of 2023-24 as long-term borrowing rates stabilise."