Coronavirus to hurt GCC's real estate, hospitality, banking sectors - S&P

Ratings agency says crisis will also reduce region's export volumes

Dubai, Dubai Marina, Jumeirah, Expo 2020 Dubai, Skyscraper, Cityscape. Image used for illustrative purpose

Dubai, Dubai Marina, Jumeirah, Expo 2020 Dubai, Skyscraper, Cityscape. Image used for illustrative purpose

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The coronavirus outbreak will have a widespread impact on the UAE and the rest of the Gulf Cooperation Council (GCC) states, affecting the hospitality, real estate, banking and export sectors, according to the latest analysis.

S&P Ratings Agency said on Wednesday that if the virus, which has now infected more than 115,000 people worldwide, is not contained soon, the GCC economies will have to grapple with lower oil prices, exports, consumer spending, property sales and lending growth. 

“COVID-19 will weigh on the economies of the [GCC] region, as weakening global demand drags down oil prices and hampers important industries, such as tourism and real estate,” the ratings agency said.

“As global financing conditions deteriorate, funding costs for more-leveraged borrowers are rising and investor appetite for less-creditworthy issuers could fade. The high level of uncertainty regarding the duration and eventual severity of the crisis will increase downside risks,” S&P added.

The coronavirus that was first detected in late December 2019 in Wuhan, China has now spread to more than 100 countries, with cases in South Korea, Italy and Iran growing at an alarming rate. The death toll has so far reached 4,200.

Precautionary measures

The UAE has suspended airline services to several destinations, especially places where the number of infections is high. Schools have been ordered shut, while events, including the biggest travel and tourism showcase in the region, the Arabian Travel Market (ATM), have been postponed. The country has also advised residents against traveling to high-risk countries.

Aside from the weaker business revenues that the precautionary measures will cause, the UAE and the rest of the GCC states will also be affected by the slow economic growth in countries seriously impacted by the coronavirus, many of which are key trading partners.

However, according to Raghu Mandagolathur, senior vice president for research at Kuwait Financial Centre, the economic impact of the coronavirus on GCC states may not be that bad, even when the global economy will undergo a recession as a result of the pandemic.

“Despite the big hit to oil revenues, the cushion of large financial buffers for GCC economies, barring Bahrain and Oman, would ensure that they are not among the worst hit,” Mandagolathur told Zawya.

“The UAE, Saudi Arabia, Kuwait and Qatar have sizable reserves that would enable them to ride through a recessionary phase and provide the necessary stimulus for their economies to recover,” he added.

Impact on exports

According to S&P, only four countries — China, South Korea, Japan and India - buy about 40 percent of the region’s exports. This leaves the GCC vulnerable to more severe disruption in those markets.

“The increasing economic implications are casting a darker shadow over the global growth outlook, which has direct implications for the GCC,” S&P said.

The ratings agency now estimates that the volume of the region’s exports will fall, and as a result, the external and fiscal balance will suffer.

Travel, tourism and consumer spending

As for the hospitality industry, which includes airlines, hotels and retail, businesses will see a drop in revenues because of lower visitor traffic and business flows.

Transit and outbound travel by visitors and residents will also reduce, as several GCC states have suspended their travel connections with countries where virus cases are high or currently spiking.

“If the coronavirus is not contained, visitor numbers will be lower than expected. However, despite this potential disruption and the uncertain recovery path, we do not expect all activity to be lost. Instead, it could be postponed — visits and events in the region could be rescheduled to later dates,” S&P said.

Creditworthiness of banks

The knock-on effects of lower economic growth and oil prices will also further slow lending growth and increase the overall stock of problem assets at banks in the GCC.

“As a result, we anticipate that the cost of risk will edge up. At the same time, interest margins will decline because the US Federal Reserve and other local central banks have cut interest rates. Combined, these shifts will weaken banks’ profitability,” said S&P.

The UAE central bank had earlier directed banks in the country to implement measures to cushion the impact of the coronavirus on customers, but rescheduling loans, granting temporary deferrals on monthly loan payments and reducing fees and commissions for affected customers.

Bahrain had also recently asked banks in the country not to freeze the accounts of residents who may lose their jobs or decide to retire from work.

(Reporting by Cleofe Maceda; editing by Seban Scaria) 


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