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GCC Corporate And Infrastructure Outlook 2023: Resilience Amid Slower Growth


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GCC Corporate And Infrastructure Outlook 2023: Resilience Amid Slower Growth

After a sharp recovery in 2022, we expect to see slower GDP growth among the GCC countries in 2023, largely because of OPEC-related oil production cuts (see chart 1). However, our 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. In the meantime, 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 favorable than in 2021. Similarly, our 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.

In 2022, despite a sharp deterioration in the global macro picture, most GCC nonfinancial corporates outperformed their peers in other markets thanks to a sharp economic recovery in the region, supported by strong commodity prices. Given continued positive credit trends, we took positive rating actions (upgrades and outlook changes from negative to stable or stable to positive) across a wide array of sectors in our portfolio. In addition, we had several positive ratings on rated GREs, following similar rating actions on Qatar (see "Qatar Upgraded To 'AA' On Declining Debt Burden; Outlook Stable," published Nov. 5, 2022); Oman ("Oman Upgraded To 'BB' From 'BB-' On Stronger External And Fiscal Performance; Outlook Stable," published Nov. 26, 2022); Saudi Arabia ("Outlook On Saudi Arabia Revised To Positive On Improving Fiscal And Economic Growth Dynamics; 'A-/A-2' Ratings Affirmed," published March 26, 2022); and Bahrain ("Bahrain Outlook Revised To Positive From Stable On Improving Fiscal Trajectory; 'B+/B' Ratings Affirmed," published Nov. 26, 2022).

Given this backdrop, our outlook bias is positive, with over 20% of our ratings on a positive outlook, and 75% on a stable outlook.

Chart 1


There are several pressure points for the global economy at present, and geopolitical risks that are at their highest in decades (see "Global Credit Outlook 2023: No Easy Way Out," published Dec. 1, 2022; and "Inflation, Geopolitics Are Twin Threats To Our Base Case," published Dec. 8, 2022), which create tail risks and uncertainties for the GCC issuers, as elsewhere.

Corporates should be able to navigate through less-accommodating debt capital markets and higher interest rates, while we expect inflation to weigh on profitability in certain sectors, albeit remaining manageable.

Healthy financial profiles and strong profitability will provide support in the face of rising interest rates. After stressing the sensitivities of a sample of 23 of our rated GCC corporates to high borrowing costs, we find that their credit metrics should be able to sustain up to an additional 300 basis points (bps) increase in interest rates, on average, without meaningfully affecting their financial risk profiles, particularly EBITDA interest coverage. We calculate that floating rate debt represents about 50% of aggregate gross debt balances (based on latest publicly available data for issuers where data is available). If we incorporate up to 300 bps increase on floating rate interest to our 2023 and 2024 base-case assumptions for the rated corporate issuers, we expect no changes that are material enough to lead us to reassess their financial risk profiles because their EBITDA interest coverage ratios remain broadly aligned, albeit with reduced headroom. In particular, we calculate that median GRE issuers' EBITDA interest coverage would drop from about 15x in our 2023/2024 base case to about 10x-12x if we increase rates by up to 300 bps. In parallel, we calculate the median for the non-GRE issuers to fall from slightly higher than 6x in the base case to about 5.0x in the stressed case.

To facilitate peer comparisons, we focus on the EBITDA interest coverage ratio because, in our view, it illustrates the immediate effect of the factors we are stressing. In deriving our credit ratings, we also use other ratios to assess the financial position, including leverage ratios such as debt to EBITDA and cash flow coverage measures such as funds from operations (FFO) to debt. While not the main driver of our ratings on most corporates--rather more relevant for more leveraged companies at the lower end of the ratings scale--we use the impact on EBITDA interest coverage ratios to highlight the risks of rising interest rates and inflationary cost pressures.

Chart 2


We think the resilient metrics of rated corporate issuers in our portfolio could be the result of a combination of factors, including:

  • The majority (about 70%) of our issuers are investment-grade companies (with ratings of 'BBB-' or above), of which close to 70% are GREs with strong ties to the regional highly rated sovereigns;
  • Solid profitability with EBITDA margin average above 40%, which could translate into a relatively stronger starting point; and
  • Solid banking relationships, which could help mitigate refinancing needs and costs.

Borrowing Maturities Will Likely Remain Manageable

Despite our expectation of some recovery in 2023, we think debt capital markets will remain less accommodating than in 2021 (see "Credit Trends: Global Financing Conditions: Bond Issuance Is Set To Expand Modestly In 2023, With Stronger Upside Potential," published Jan. 30, 2023). In the meantime, looking at the publicly rated corporates where maturity breakdown is publicly available, we believe the maturity schedule is manageable. As of Sept. 30, 2022 (or the most recent financials available for some of the corporates), maturities of the aggregate debt were limited to about 11% over the following 12 months, then an additional 12% within the subsequent 12 months. While the aggregate numbers might be skewed to a certain extent, given the presence of issuers with high ratings and large long-term borrowing levels, we are still comfortable with the maturity profile for the corporates, because most entities have healthy cash balances as well as long-standing relationships with banks to replace capital market funding with bank funding if needed. Lower global liquidity is likely to have a limited impact on GCC banks because of their strong net external asset positions or limited net external debt positions (see "GCC Banking Sector Outlook: Cautiously Optimistic," published Jan. 31, 2023) and we expect the banking market to remain accommodative of strong corporate credits. Publicly rated infrastructure projects in the region are not exposed to any refinancing risk. We expect all the projects to meet their long-term debt obligations (typically between 15 and 30 years' tenor).

Chart 3


The Relatively High Floating Rate Exposure Will Affect GCC Issuers

The latest publicly available data on 23 of our rated GCC corporates shows that close to half of reported gross debt balances on aggregate are exposed to floating interest rates. A handful of companies operate with close to 100% floating debt capital structures, making them particularly vulnerable, especially for those operating in cyclical industries such as real estate that may suffer from economic headwinds. However, most exhibit a more balanced debt composition. The utilization of interest rate swaps to hedge floating debt exposure is rather limited in the region. Therefore, we expect issuers will continue to proactively engage with their lenders to renegotiate more favorable loan terms. On the infrastructure side, most of the rated issuers have almost fully hedged their long-term debt, leaving them with a significantly reduced floating rate risk.

Chart 4


Inflation's Impact On Profitability Will Be Limited For Many Corporates

We think most corporates in various sectors will be able to pass through an important portion of the cost increase to their products and services and therefore we see relatively manageable impact on profitability. Similar to many other countries, price levels have been rising in the GCC countries. However, inflation has been notably lower than most developed and emerging markets primarily thanks to sizable government subsidies, particularly for energy and food staples, which have been key inflation drivers elsewhere.

The real estate sector, exposed to higher construction costs, is sheltered in the short term from a substantial cost inflation pressure because construction is generally outsourced on fixed terms. In the longer run though, this could weigh on the margins, because the developers' ability to pass on price increases depends on supply and demand, which may not be supportive because buyers' purchasing power could be affected.

Feedstock and input cost inflation has affected many food retailers and, even though they have been able to pass on price increases, we have observed margin contraction in the sector. For example, Almarai Co. (BBB-/Stable/A-3), despite posting 18% revenue growth in 2022, saw a moderately lower S&P Global Ratings-adjusted EBITDA margin of 22% (versus 22.6% in 2021 and 31.3% in 2018). In our infrastructure credits with an underlying Public Private Partnership framework, inflation risk is usually transferred to the public authority except on renewable assets, where tariffs are fixed regardless of inflation.

Chart 5


We Expect Divergence In Country-Level Performance

In Saudi Arabia, as discussed in "Saudi Arabia's Vision 2030: Some Likely Winners," published Dec. 5, 2022, corporate activity across the key sectors should remain elevated on the back of continued infrastructure investments by the Saudi government and its entities, and we expect further recovery in the tourism and hotel sectors, particularly given the lifting of restrictions on Hajj and Umrah visitor numbers.

Similarly, in the United Arab Emirates (UAE), we expect growth momentum to continue across various sectors but at a slower pace, supported by the government's initiatives and spending plans that aim to grow the population and maintain the country's status as the region's business and financial capital. In January 2023, the Dubai government announced the "D33" Dubai Economic Agenda, which, among other targets, aims to double the size of the emirate's economy over the next decade via various efforts, such as supporting private-sector growth and foreign trade, as well as additional government spending. After a sharp price appreciation in Dubai's real-estate market in 2021 and 2022, we expect the prices for residential real estate to stabilize. UAE hotels had a strong year in 2022, supported by the World Cup visitors, and we expect the tourism and aviation sector to continue recovering in 2023, further boosted by the reopening of China and the return of Chinese tourists. While the new corporate tax comes into effect from June 1, 2023, we do not anticipate any cash flow implications before 2024, nor do we expect much disruption for the corporate sectors in the current year. We also note that there are several exemptions, such as for GREs or companies established in freezones. We expect infrastructure projects to use the change in law provisions embedded in the concession agreements to shield themselves from the corporate tax increase.

In Qatar, we expect a post-World Cup slowdown in activity, particularly across the tourism and aviation sectors (see "Credit FAQ: World Cup Will Give An Additional Near-Term Boost To GCC," published Nov. 7, 2022). In the short term, we see modest monetary benefits to QatarEnergy (QE; AA/Stable/--) from diverting liquefied natural gas (LNG) to Europe from Asia to help bridge the gap of curtailed Russian gas imports into Europe, and the EU's diversification efforts. This is because most of QE's gas contracts are long term, expiring after four years or more, with divertible shipments accounting for 10%-15% of its total LNG export volumes at best. In the longer term, however, we anticipate Qatar could play an important role in European governments' plans to be independent of Russian oil and gas by 2030. Qatar is embarking on an investment program to significantly increase LNG production capacity to 126 million tons per year (mtpa) from 77 mtpa by 2027 (see "Qatar Could Gain As Europe Diversifies From Russian Gas," published March 16, 2022).

Current And Long-Term Regional Risks: By Sector

Chart 6 summarizes our views on the current risks (over the next 12–24 months), as well as more structural long-term risks to the revenue and EBITDA generation of the GCC corporates. We discuss our rationale for the risk classifications and the trends for most of these sectors in the sector-specific paragraphs below.

Chart 6

Oil and gas: National oil companies and oilfield services

Hydrocarbon prices in 2023 and 2024 should support intrinsic credit quality for the oil and gas sector in the region. Our assumption of broadly balanced global supply and demand dynamics should provide a supportive oil-price environment, and in turn healthy cash flow for the sector. For the GCC national oil companies (NOCs), while we understand Saudi Aramco in KSA (not rated) and ADNOC in UAE (not rated) plan to increase crude oil production capacity by 2027 and boost gas production over the next decade, we expect the broadly cautious spending approach witnessed over the past few years to continue, with exploration and production (E&P) spending increasing only modestly. In particular, we anticipate that debt to EBITDA will remain significantly below 1.0x over 2023 and 2024 for our rated NOCs. Credit quality in the sector continues to benefit from supported oil prices, and GCC NOCs also benefit from extremely favorable cost and reserves profiles.

We align most of our ratings on other NOCs in the region with their respective sovereigns; for instance, QatarEnergy (AA/Stable/--) or Energy Development Oman (BB/Stable/--).

Oilfield service (OFS) companies should benefit from the overall supportive environment.   Increased targeted production capacity from the NOCs means fleet expansion and improved contract visibility for OFS players. As a result, we have seen several rig acquisitions and asset relocation, particularly in the offshore segment, to cater for the growing demand. In the UAE, for example, ADNOC Drilling (not rated) has almost doubled its offshore jack-up fleet to 32 since early 2021, and ADES International (not rated) announced in September 2022 plans to acquire seven drilling jack-ups from Seadrill for $628 million, with four already contracted with Saudi Aramco. When assessing OFS companies in our rated portfolio, which are typically speculative-grade (such as Shelf Drilling), we focus on liquidity management and capital-structure resilience, especially given the challenges of rising borrowing costs and the inflationary cost environment.


Our rated chemical companies in the GCC benefit from competitively priced feedstock (compared with global peers, which puts them at the top quartile of the cost curve), which is supplied by favorable long-term contract agreements from their majority shareholders--that is, the respective NOCs, which benefit from access to large and abundant reserves. This, in our view, should provide further cash flow visibility amid energy supply concerns in other regions (see "Stressing Accessibility, Affordability, and Availability: Can GCC Chemical Companies Stand The Heat?," published Oct. 10, 2022). As a result, for our rated GCC chemical issuers, we anticipate revenue declines of about 10% on average in 2023, to factor in pricing pressure from capacity additions in petrochemical products and an overall softer macro, before normalizing in 2024. At the same time, while we expect above-average profitability to persist--albeit below 2021-2022 levels, to factor in inflationary pressures--we expect EBITDA margins for our rated issuers to average about 25%-30% in 2023 and 2024, compared with 32% in 2021, and an estimated 28% for 2022. We also anticipate broadly higher capital expenditure (capex) in 2023, but with credit metrics that support ratings, with S&P Global Ratings-adjusted debt to EBITDA for the rated issuers to remain, on average, below 1.0x.


The telecoms sector exhibits low cyclicality historically. In our our view, this is supported by generally stable regulatory frameworks in the GCC countries, which help sustain relatively stable profitability. Therefore, we consider long-term risks for the telcos as low. We also foresee relative stability and low-single-digit growth rate for the telecom operators in the GCC region, with notable opportunities around asset monetization, including towers and data centers. More geographically diversified players will continue to see a drag on their top line from the depreciations of emerging currencies, while their generally healthy balance sheets leave headroom for external growth and dividends.

Travel and hospitality

We expect the hospitality and retail sectors in the GCC region to continue recovering, as international leisure and business travel continues to rebound. Still, our outlook remains cautiously optimistic amid the potential deterrent of a weak global economic outlook, which we expect to eventually spill over to the region and which could trim consumer spending. In addition, we expect an increase in Chinese visitors since China reopened after a lengthy period of restrictions, albeit subject to COVID-19-related developments. Hospitality's rebound will continue as leisure and business travel recovers, but constant capacity additions in Dubai, and significant new rooms built in Qatar for the World Cup, will likely weigh on average daily rates and preclude occupancy rebound. We believe Dubai will remain attractive given its well-established reputation as a tourist destination, while Saudi Arabia will also see an increase in visitors as it deploys new entertainment and hospitality venues to achieve its tourism-related objectives.

Real estate

Long-term challenges in the GCC region for real estate are related to the sector's structural cyclicality. This is compounded by the high proportion of foreign nationals and a track record of population declines in cyclical troughs, which affect the demand for--and therefore the prices of--real estate. We think Dubai will continue to attract new residents and that the demand for residential real estate will continue, but we expect a slowdown in price increases. Chinese buyers could further support demand, which could mitigate any potential impact from the economic headwinds. Our outlook for the residential real-estate sector in the GCC region remains stable for 2023. In Dubai, demand will be sustained by economic activity, population growth, and relatively affordable residential prices relative to other global hubs, as the emirate continues to attract new residents. However, we expect prices to stabilize after two years of rally as demand growth will also slow down. Given the historically low share of mortgage transactions (around 20%-25%), we expect rising interest rates to have limited impact. We think that mall operators will benefit from improving footfall as the inflow of tourists grows, and the retail sector will continue to thrive as a consequence, helped by relatively lower inflationary pressures on consumers relative to other regions. Saudi Arabia's residential real estate will also surf on strong economic momentum as the country pursues its target to increase home ownership to 70% of population by 2030. At the same time, we expect that Qatar will struggle with oversupply as new residential units were delivered for the World Cup at the end of 2022, which we think will lead to a significant correction in rentals in 2023.


Our expectations for the retail sector vary by segment. In general, we expect the inflation impact to persist and input costs to remain high. We therefore expect consumption trends to soften, especially for apparels, durable goods, and other discretionary products. The food and beverages segment, especially in Dubai and Saudi Arabia, has seen volume growth spurred by increased tourism, population growth, and the hosting of sporting and other entertainment events in the latter part of 2022. We have also seen successful price increases being passed on to consumers, although these have not entirely mitigated the cost of inflations, which has led to margin erosion. As the supply chain bottlenecks and commodity prices ease, we think price increases will also be limited. We expect the luxury segment to remain resilient and be further supported by the reopening of the Chinese economy and resumption of travel, because the Chinese are significant consumers of luxury retail.


Schools returned to mandatory in-person learning in 2022, which supported growth. Another contributing factor was population growth, especially in Dubai and Saudi Arabia, which led to increased enrollment levels. However, in UAE, the regulator--Knowledge and Human Development Authority (KHDA)--has not allowed a school tuition fees hike for the past four years. Despite this, and some new school openings, we see education companies grow their top line, driven by growth in support services such as school buses, canteens, uniforms, and so on. While government efforts toward visa reform are helping population growth and creating stickiness toward UAE, we do not expect much new supply as the market approaches saturation, especially in the premium segment.

The Prospects For Infrastructure Remain Strong

We expect GCC infrastructure assets to comfortably navigate 2023, despite the challenging macroeconomic environment in which they operate. For instance, all our rated projects in the region continue to perform strongly and all have a stable outlook.

We expect strong growth in the next five years in the region, primarily among the social infrastructure and energy segments. Indeed, as part of the GCC countries' strong commitment to increasing GDP and diversifying away from oil and gas, we have seen countries in the region creating financial organizations to maximize liquidity for future infrastructure needs. Over the past 18 months, GCC countries benefitted from high oil and gas prices, allowing them to launch various initiatives in the infrastructure space with significant capital amounts, including a renewable pipeline. We expect this trend to continue in the short term given the supportive hydrocarbon environment. In Saudi Arabia, the National Development Fund approved financing and support amounting to nearly $36 billion over 2022 to various projects, including the landmark green hydrogen complex in the city of Neom--a cornerstone in Saudi Arabia's strategy to export nonhydrocarbon products by capitalizing on its considerable solar and wind resources. Finally, long-term competitive liquidity will be a key strength in today's market where infrastructure needs are booming and where there is little possibility of recycling capital via the debt capital market.

Inflation will have a limited impact on our infrastructure issuers, while the global supply chain is gradually returning to its pre-pandemic situation, which is a positive factor for projects relying on key strategic equipment imports. Our rated independent water and power producers (IWPPs) in the region benefit from an availability-based tariff with an operations and maintenance (O&M) component, which is paid by the offtaker in respect to the plant's contracted capacity for power and water, irrespective of how much power and water is dispatched. This fixed O&M payment is indexed to inflation to match the fixed operating costs of the project company. Therefore, the inflation movements do not pose a risk to debt service. Although this protection is not available to renewable assets in the region where typically solar independent power producers are paid a nonindexed feed-in tariff, we expect a limited impact on forecast cash flow, given a relatively high portion of fixed operating costs.

In the past two years, worldwide logistics difficulties combined with China's numerous lockdowns have led to unbalanced supply and demand in key strategic equipment used in the energy sector, such as photovoltaic modules. As home to the world's largest solar plants (see "Gulf Nations Invest To Accelerate Deployment Of Renewable Energy," published Feb. 27, 2023), the GCC region was exposed to module and solar inverter price fluctuations and shortages in 2022. We expect the supply situation to revert to pre-pandemic levels by end-2023, because factories in China are reopening and ports congestion worldwide is easing.

In the GCC region, most of our rated assets have been financed on a limited recourse basis to their respective sponsors. Aligned with the regional project finance precedents, it is common to have high-interest-rate-hedging covenants applicable to the debt to shield the project companies from market movements. In fact, all our rated projects benefit from either a fixed coupon bond or a combination of fixed coupon bond and hedged commercial debt. Therefore, despite the high yield environment, we do not foresee any cash flow stress on our rated projects.

We do not expect rated 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.

Outlooks Indicate Resilience For Corporate And Infrastructure Issuers

We rate 32 corporate and infrastructure issuers in the GCC region on a global scale and given the role the governments play in the overall economic activity in the region, 18 of these rated entities are GREs. Strong sovereign credit profiles such as Abu Dhabi, Kuwait, Qatar, and Saudi Arabia translate into high credit ratings for these entities, because we see potential support from their associated sovereigns.

In 2022, on the back of our positive rating actions on Qatar, Oman, Saudi Arabia, and Bahrain, we also took similar rating actions on several GREs. We also took positive rating actions on several entities based on their stand-alone performance, particularly in real estate and in Dubai (see charts 8 and 9).

Chart 7


Currently, 24 of our rated entities carry a stable outlook, and seven are on a positive outlook (including three Saudi GREs where our outlooks mirror that on the sovereign), which reflects our expectations of resilience for the rated corporate and infrastructure issuers in 2023.

Chart 8


Chart 9


Related Research

This report does not constitute a rating action.

Primary Credit Analysts:Timucin Engin, Dubai + 971 4 372 7152;
Rawan Oueidat, CFA, Dubai + 971(0)43727196;
Tatjana Lescova, Dubai + 97143727151;
Sapna Jagtiani, Dubai + 97143727122;
Ilya Tafintsev, Dubai +971 4 372 7189;
Sofia Bensaid, Dubai +971 (0)4 372 7149;
Secondary Contacts:Pierre Gautier, Paris + 0033144206711;
Trevor Cullinan, Dubai + (971)43727113;

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