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A look at the big themes for GCC corporates through year’s end, including why Riyadh will lead growth in Saudi real estate to the outlook on appetite for s-linked debt, here’s a look at what S&P Global thinks will be the big themes for GCC corporates through year’s end.
The webinar: An S&P Global Ratings gathering yesterday headlined “GCC Corporate Outlook 2024” that dove into sectors including oil and petrochem, real estate, capital markets, and banking, along with forecasts for macro indicators.
The speakers: Rawan Queidat, director of corporate ratings, Tatjana Lescova, associate director of corporate ratings, Trevor Cullinan, director and lead analyst of GCC sovereign ratings, and Mohamed Damak, managing director of financial institutions ratings. Sapna Jagtiani, director and lead analyst for GCC corporate ratings, was moderator.
Among the key takeaways:
OUTLOOK-
The GCC region is in for a moderate expansion of 2-3% on average, while non-oil activity in Saudi Arabia and the UAE are poised for robust growth at around 5%, driven primarily by the tourism, hospitality, retail, and aviation sectors.
Growth drivers in Saudi: The education sector is expected to expand primarily due to population growth, and sectors of consumer products and healthcare are also forecast to perform well. The strong momentum in M&A activity will boost otherwise slow-growing telecoms, while construction remains resilient due to a strong pipeline of massive infrastructure projects.
OIL + PETROCHEMICALS-
Higher earnings + capex: The EBITDA of oil and petrochem companies in the region are expected to rally, with 5-10% annual increases in EBITDA, recovering from a 2023 hiccup. Expect subdued demand at least in 1H 2024, with oversupply easing compared to last year’s levels. Corporate capex is expected to fal in the range of USD 45-50 bn.
The sector rallies on low-cost production + healthy balance sheets: Rated chemical producers in the GCC enjoy a competitive advantage in the market since they benefit from low-cost production and healthy balance sheets, allowing them to swiftly dodge inflation risks–especially in Saudi Arabia where profitability manages to survive the price hikes in these sectors.
Downside risks include geopolitics, potential delays in investment plans, and slower than expected economic growth.
REAL ESTATE-
S&P Global Ratings sees growth in the Saudi real estate sector being driven by a significant relocation to Riyadh and other large cities along with mortgage schemes that are part of a government policy of raising home ownership by 70% by 2030. Growing inflows of skilled expats and the introduction of a premium residency scheme will also have a positive impact on the sector.
The downside risks: The ratings agency highlighted that demand in Saudi is particularly sensitive to interest rates — causing affordability issues especially in Riyadh. Still, the impact on demand could be marginal and we could be heading into a cycle that sees three rate cuts this year led by the US Federal Reserve (see this morning’s Planet Finance, below).
BANKING-
A slowdown in lending growth for Saudi and the UAE is imminent, said Damak. While lending activity could grow a robust 8-9% this year, it would still be slower than 2023 due to tighter liquidity.
The specifics: Corporate lending is expected to increase on the back of mega- and gigaprojects, while mortgage lending will drop on the back of higher rates and market maturity. Local banks stood out with a capital adequacy ratio at almost 20% last year as they continued to be profitable.
DEBT-
The decline in global issuances in 2023 was mainly driven by a drop in sales by Saudi Arabia — particularly local currency issuances — given that most buyers of the Kingdom’s lCY issuances are local lenders that have been facing tighter liquidity conditions. This was balanced by a rise in foreign-currency issuances amounting to USD 50 bn.
Saudi Banks have experienced a slight decline in liquidity in recent years. To foster growth, these banks will need to mobilize resources and will have to resort to external funding. There’s a possibility that Saudi banks might reorganize their balance sheets, potentially divesting from mortgage lending, depending on interest rates.
REMEMBER- Global sukuk issuance (in local and foreign currencies) declined 6% y-o-y to USD 168 bn in 2023.
The outlook: Higher financing needs are expected to trigger market growth. The global FCY sukuk market is expected to expand, propelled by higher financing needs in Riyadh and other Islamic finance countries.
Lack of a standardized interpretation of Sharia could continue to be an obstacle: Unexpected liquidity shortages along with issues caused by the complexity of sukuk issuances compared to regular bonds continue to introduce limitations to sharia-complaint issuances. Also, the potential upcoming adoption of the accounting and auditing organization for Islamic financial institutions’ Sharia standard 62 might reduce issuance volumes because it could materially alter the nature and risk characteristics of sukuk instruments.
^^ Check out our past coverage of the downside risks of standard 62 in the link above.
CAPITAL MARKETS-
S&P Global expects green, social, and sustainability-linked bonds globally “to grow modestly” in 2024 at around the USD 1.1 tn level, slightly higher than in 2023, S&P analysts forecast. They expect a continued growth in issuances in the region after bond issuances more than doubled last year to reach USD 23 bn. Sustainable bonds issuances in the Middle East account only for less than 3% of total bond issuances globally.
Saudi and the UAE will remain top issuers of the bonds in the region driven by government-related entities in order to help meet sustainability targets and commitments. “Given the exposure of these two nations’ exposure to hydrocarbons and water scarcity, we expect green bond issuances to remain prevalent,” they said.
INFLATION + INTEREST RATES-
Geopolitical tensions are poised to cause risks on corporate operations in sectors such as oil and gas, shipping, and beyond. Sticky global inflation, supply chain kinks, and delays in interest rate cuts — were they to come to pass — could present operational challenges including higher freight costs and insurance premiums, delivery delays, and even harm consumer confidence, suggests Oueidat.
Disruptions in the Red Sea are not a significant concern since GCC hydrocarbons primarily flow through Asia.
DIVERSIFICATION-
Saudi’s diversification strategy under Vision 2030 has helped bolster economic resilience, they said. “However, a consideration that we have come to in regards to the funding of Vision 2030 [as a whole]: We think there would be something like a weakening in the net external and the net asset position of the government,” they said. The gap would be mainly funded by debt that isn’t necessarily government debt. “The Public Investment Fund is borrowing, potentially it will borrow more towards the end of the year,” they said.
REMEMBER- The PIF is stepping in as the Kingdom’s treasury prepares to run deficits through 2026 and pace out the implementation of some aspects of select Vision 2030 projects.
