GCC corporates face tough credit outlook in the face of slowing growth

Dubai: Low economic growth, weak consumer and business confidence and tight liquidity conditions are expected to keep outlook of GCC non-financial corporates in 2017 negative, according to Moody’s Investors Service. However, some investment grade rated entities are expected to remain resilient.

“GCC companies, particularly those in oil & gas and oilfield services, are being hurt by low oil prices, which are limiting growth prospects in the region and reducing companies’ financial buffers. Liquidity is also tightening, but should remain manageable for large corporates,” said Rehan Akbar, a Moody’s assistant vice president.

Out of the 32 rated corporates in the region, 23 (71 per cent) are assigned stable outlook while 8 have negative outlook and rating of one entity is under review.

In GCC countries budget cuts and reprioritisation of public spending poses downside risks to credit outlook. The region’s growth is significantly lower in 2016 and 2017 as a result of low oil prices with a slight uptick in GDP anticipated by 2018. While rated GCC corporates are being hurt by low oil prices, firms in oil & gas and oilfield services have been impacted more than others.

Low oil prices are resulting in subdued growth, reducing financial buffers at current rating levels. Although the overall liquidity in the region has been tightening, the rating agency expects the situation manageable for large corporates.

In oilfield services, major rated entities face depressed utilisation levels and day rates due to low oil prices. While leverage and interest coverage metrics have weakened for many entities, refinancing risk is on the rise in the light of weakening liquidity profiles and lower free cash-flow generation.

Leading regional real estate players are also facing pressure as key markets are facing downward pressure on valuations. Moody’s expects Dubai Market to remain soft in 2017 with lack of positive catalysts on the horizon. But the situation is projected to remain manageable for tier-1 players such as Emaar Group that have a substantial development pipeline and low level of debt. Hospitality continues to remain under pressure as a result of rising supply and strong dollar.

In Abu Dhabi, residential and office rents are under pressure as government continues with fiscal consolidation measures and corporates trim employee costs. Hospitality sector is facing challenges as corporate demand declines but focus by government on promoting tourism to support sector over the medium term is seen as a mitigating factor. Overall, rental rates for grade ‘A’ properties are holding up better, but at the expense of lower quality properties. Tier-1 players such as Aldar are expected to remain resilient given strong balance sheets.

Reduced government spending and lower subsidies are expected to weigh on investor confidence and is likely to impact the credit outlook of Saudi real estate entities. Contractors are significantly impacted by delays in government disbursement although. White land tax has been introduced and could increase costs for some developers the impact on developers will be more visible in 2017.