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Budget cuts and reprioritization of public spending poses downside risks to Arab countries’ credit outlook.
Budget cuts and reprioritization of public spending poses downside risks to Arab countries’ credit outlook.

Moody’s Slashes (P)GCC Non-Financial Corporate Outlook

(P)GCC region’s growth is significantly lower in 2016 and 2017 as a result of low oil prices with a slight uptick in the GDP anticipated by 2018

Moody’s Slashes (P)GCC Non-Financial Corporate Outlook

Low economic growth, weak consumer and business confidence and tight liquidity conditions are expected to keep outlook of (Persian) Gulf Cooperation Council Arab non-financial corporates in 2017 negative, according to Moody’s Investors Service. However, some investment grade rated entities are expected to remain resilient.
The (P)GCC Arab 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, Albawaba reported.
Out of the 32 rated corporates in the region, 23 (71%) are assigned stable outlook while eight have negative outlook and rating of one entity is under review.
In (P)GCC Arab countries (Saudi Arabia, Kuwait, the United Arab Emirates, Qatar, Bahrain, and Oman), budget cuts and reprioritization 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 the gross domestic product anticipated by 2018. While rated (P)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.

  Under Pressure
In oilfield services, major rated entities face depressed utilization 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.

  Saudi Fiasco
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. White land tax has been introduced and could increase costs for some developers the impact on developers will be more visible in 2017.
Saudi Arabia is likely to take more cost-cutting measures as local experts say the country’s deficit is expected to hit $69 billion by the end of 2016.
The figure, albeit lower than the government projection of $87 billion, is still considered high for a country that has been clobbered by the sharp drop in oil prices since 2015, Xinhua reported recently.
In late November, the Persian Gulf Arab country said its total public debt has reached $91.2 billion, with an outstanding debt of $53.3 billion in the year 2016 alone.
In October, Riyadh, for the first time, issued an international sovereign bond of $17.5 billion, the biggest emerging market bond sale on record, with a view to slowing the drawdown of its foreign exchange reserves, buying more time to adjust its economy, and eliminating the risk of currency devaluation for the foreseeable future.

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