Mubasher: Economic growth among the GCC countries is forecast to be slower in 2023, following a sharp recovery in 2022, according to a recent report by S&P Global.
The report attributed the sluggish economic growth to OPEC-related oil production cuts.
Nevertheless, S&P Global believes that oil prices will remain relatively high, with the Brent oil price averaging $90 per barrel in 2023 and $80 in 2024.
Therefore, the financial services provider does not expect a significant negative impact on non-oil gross domestic product (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,” the report underlined.
Meanwhile, rated GCC corporate issuers generate healthy and stable revenues, which will enable them to absorb manageable hikes in the cost of funds as well as inflation's effect on their margins.
Limited Inflation's Impact on Profitability
In spite of hiking prices, the GCC countries witnessed lower inflation compared with most developed and emerging markets mainly due to sizable government subsidies, particularly for energy and food staples, which were key inflation drivers elsewhere.
Meanwhile, the real estate sector, which is exposed to higher building costs, is protected in the short term from substantial cost inflation pressure, as construction is generally outsourced on fixed terms.
However, this could weigh on the margins in the long run because the developers' ability to pass on price surges relies on supply and demand, which may not be encouraging since buyers' purchasing power might be affected.
Regarding food retailers, they managed to deal with price increases, yet, they were struck by feedstock and input cost inflation.
For example, Almarai Company reported an 18% growth in revenue in 2022 and received a slightly lower S&P Global Ratings-adjusted earnings before interest, taxes, depreciation, and amortisation (EBITDA) margin of 22%. This is compared to 22.60% in 2021 and 31.30% in 2018.
Divergence in Country-level Performance
S&P Global underlined that corporate activity across key sectors in Saudi Arabia should remain elevated on the back of continued infrastructure investments by the government as well as its entities.
The US-based company predicted that the Kingdom will see further recovery in tourism and hotel sectors, especially after lifting the COVID-19 restrictions on Hajj and Umrah visitor numbers.
On the other hand, the growth momentum of the UAE is expected to continue across various sectors but at a slower pace. This is driven by the government's initiatives and spending plans that aim to grow the population and maintain the country's position as the region's financial capital.
Last year, UAE hotels registered a solid performance, backed by World Cup visitors. Furthermore, the tourism and aviation sector is projected to keep recovering in 2023 due to the reopening of China and the return of Chinese tourists.
“While the new corporate tax comes into effect from 1 June 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,” S&P Global mentioned.
It elaborated: “We expect infrastructure projects to use the change in law provisions embedded in the concession agreements to shield themselves from the corporate tax increase.”
As for Qatar, activities across the tourism and aviation sectors are forecast to slow down after the end of the World Cup.
In the short term, QatarEnergy will financially leverage diverting liquefied natural gas (LNG) to Europe from Asia, which aims to bridge the gap of curtailed Russian gas imports into Europe.
S&P Global highlighted that this is because most of QatarEnergy’s gas contracts are long-term, expiring after four years or more. It added that divertible shipments represent between 10% and 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,” the report underscored.
Prospects for Infrastructure Remain Strong
GCC infrastructure assets will smoothly navigate 2023 in spite of the challenging macroeconomic environment in which they operate.
“We expect strong growth in the next five years in the region, primarily among the social infrastructure and energy segments,” the financial services firm stated.
Outlooks Highlight Resilience for Corporate & Infrastructure Issuers
The report underlined that powerful sovereign credit profiles such as Abu Dhabi, Kuwait, Qatar, and Saudi Arabia enjoy high credit ratings due to potential support from their associated sovereigns.
The credit ratings firm indicated: “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.”