After a very challenging 2020 amid the COVID-19 pandemic and oil price shock, we expect GCC economies to grow moderately this year. Pressures look set to continue in corporate sectors, particularly for companies operating in tourism, aviation, real estate, and non-food retail. The same is true also for the larger oil, gas, and commodities sectors--including oil field services---because we expect revenue generation to remain under pressure relative to 2019. Currently, close to 38% of nonfinancial corporations and infrastructure entities we rate in the GCC carry a negative outlook (including one on CreditWatch with negative implications). If we exclude government-related entities (GREs), which represent just over half of our corporate and infrastructure rated portfolio, this ratio reaches close to three-quarters.

Given the negative operating outlook, we expect most corporates to maintain conservative strategies. Absent a substantial recovery in revenue generation, they are likely to focus on cost optimization, proactively managing their liquidity, and preserving their cash flows, while new investments will continue to take a back seat in most sectors.

Caution Will Characterize 2021

While the worst may be behind us, we expect economic pressures to continue and recovery to be slow and gradual. After suffering a major contraction in 2020, we expect aggregate real GDP growth of just 2.5% in the GCC economies between 2021 and 2023 (see charts 1 and 2). (for further details see "GCC Economic Activity Held Back By Its Hydrocarbon-Heavy Economic Structure And OPEC-Related Production Cuts, published Dec. 7, 2020, on RatingsDirect).

We expect Brent oil prices to average $50 in 2021 and 2022 and $55 in 2023 and thereafter. As vaccine rollouts in several countries continue, S&P Global Ratings believes there remains a high degree of uncertainty about the evolution of the coronavirus pandemic and its economic effects. Widespread immunization, which certain countries might achieve by midyear, will help pave the way for a return to more normal levels of social and economic activity. We use this assumption about vaccine timing in assessing the economic and credit implications associated with the pandemic (see our research here: www.spglobal.com/ratings). As the situation evolves, we will update our assumptions and estimates accordingly.

While we expect economic growth to gradually recover, we think the size of the economies of most sovereigns in the region will still remain below their 2019 levels by 2022. As a result, GCC corporates are likely to continue to face broad-based pressures.

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Most GCC corporates endured visible stress on their revenue and EBITDA generation in 2020. Their priority this year will be to recuperate 2020 losses, while operating in a slow-growth environment.

We expect most companies will face revenue-growth challenges in 2021 amid a lack of visibility on the timing of a recovery and COVID-19-related uncertainties. A significant number of rated corporates reduced or deferred their capital expenditures in 2020. Some, such as real estate, reduced and/or eliminated dividends to conserve cash. Some companies are also monetizing assets to reduce their leverage. We expect these trends to continue through 2021.

Sector- and country-level vulnerabilities, which we already highlighted in our July 2020 report "Twin Shocks Of Low Oil And COVID-19 Mean Double Trouble For GCC Corporates" (July 21, 2020) will be largely unchanged through 2021. While we expect the recent resolution of the Qatar dispute to be positive for Qatar's real estate and tourism sectors, we think it is too early to expect demand for these two sectors to improve significantly.

We still expect that a full recovery in the global aviation and tourism industries will take time; hence these sectors remain most exposed. While there is considerable uncertainty regarding the outlook for global air travel, we nevertheless expect a weak recovery in 2021, with traffic and revenues still 40%-60% lower than in 2019, and 20%–30% lower in 2022 (see "As COVID-19 Cases Increase, Global Air Traffic Recovery Slows," Nov. 13, 2020). This is in spite of our base case that effective immunization against the coronavirus will become widely available by mid-2021. Therefore we expect the pressures on the region's aviation and tourism sectors to remain in place. The United Arab Emirates (UAE) is reportedly leading the vaccination effort in the region, with an immunization rate of above 25% of the population, the second-highest globally. High vaccination rates could help the UAE tourism sector recover earlier than others globally.

Most national oil companies (NOCs) and oil majors continue to focus on cost optimization, renegotiating their contracts and pricing agreements, and generally limiting capital expenditures, which means continued topline pressures for the oilfield services companies.

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Two key sectors in the GCC region, real estate and oil field services, represented around half of our negative rating actions we took in 2020. In the face of continued negative investment sentiment, we expect demand for real estate to remain subdued. While we have seen a significant decline in new launches in Dubai, we still expect the supply overhang to limit any short- to medium-term recovery.

Although we think that current conditions may challenge disposals of assets and valuations in distressed sectors such as real estate, oil field services, and retail, we are also seeing selective opportunistic transactions among the regional telecom operators. For example, Ooredoo's Indonesian subsidiary has taken up tower sales, and in Saudi Arabia we are looking at asset monetization opportunities--Saudi Telecom Co. (STC) has announced plans to publicly list its subsidiary STC Solutions in 2021, and it has sold a 15% stake in its payment solutions subsidiary STC Pay to Western Union.

Companies within the GCC infrastructure sector tapped into the capital markets over the past 12 months and continue to look to them to achieve long-term borrowings at competitive pricing. Given the declining long-term liquidity from the banking sector combined with relatively low interest rates, we have seen companies in the power and oil and gas sectors willing to refinance their debt obligations by accessing a large pool of institutional investors looking for stable and long-term yields. Furthermore, we have noticed an increasing number of securitization plans of large infrastructure assets, both in the public and private sector, to attract low-cost capital. We expect that this trend will carry on in 2021 given the continuing low interest rates.

Abating Geopolitical Risks And Reforms Should Aid Recovery

The Abraham Accord signed by the UAE, Bahrain, and Israel last September, has paved the way for normalization of relations between these countries (see "Israel's Agreements With Bahrain And The UAE Signal Shifting Alliances In The Middle East," published Sept 17, 2020). We believe there are major opportunities for cooperation in areas such as tourism, security, and financial services among many others, particularly benefiting Dubai, the region's tourism, aviation, and international trade and logistics hub.

Another supportive development was seen in Qatar (see "Resolution Of The Qatar Dispute To Improve Political And Economic Cooperation In The GCC Region," Jan 7, 2021). Saudi Arabia and UAE have now reopened their borders with Qatar, and we expect the other parties to the Abraham Accord to follow. Over time, this will likely result in a material softening of the pressures experienced by the Qatari aviation, tourism, and real estate sectors since the summer of 2017 due to the boycott.

The UAE, which hosts the most diversified and internationally open economy in the region, has also undertaken some major reforms. These include allowing 100% ownership of on-the-shore companies by foreign nationals to boost foreign direct investments. Similarly, the UAE also undertook certain social rules including allowing expatriates to follow their home countries' laws on inheritance and divorce. During the year, the UAE also implemented certain rules to provide long-term residence options to highly qualified expatriates in selected fields. We believe all these changes will further increase the attractiveness of the emirates as a global tourism and expat destination.

However, not all reforms are immediately supportive for the corporate cycle. In Saudi Arabia, value-added tax was increased to 15% from 5% on July 1, 2020, alongside higher import fees on a large range of products to support the government budget. These measures came at a time when the economy, disposable income, and consumer demand were already under pressure, and we expect the effect to reverberate in 2021. Currently, we do not expect any other GCC nation to follow through with such high VAT increases. Oman will start implementing a 5% VAT rate starting April 2021.

Stable Outlook For GREs, Largely Negative For The Private Sector

We currently rate 32 corporate and infrastructure issuers in the GCC region. Reflecting the strong role governments play in the overall economic activity in the region, 17 of the 32 issuers we rate are government-related entities (GREs). The strong credit profiles of the sovereigns, such as Abu Dhabi, Kuwait, Qatar, and Saudi Arabia translate into high credit ratings for these GREs because we envisage potential support from their associated sovereigns.

After several rating downgrades in 2020, currently about 60% of our corporate and infrastructure ratings have a stable outlook. However, when we exclude GREs, only 27% of private sector companies have stable outlooks, which includes one on CreditWatch with positive implications. Reflecting our concerns on topline generation, real estate and companies in the oil and gas space (mostly oil field services) together represent 75% of our negative outlooks and negative CreditWatch, while entities in Dubai represent more than 65% of the negative outlooks and negative CreditWatches. Although the UAE implemented several structural measures in 2020 that are supportive of its long-term business prospects, we still expect the recovery in the key sectors powering Dubai's economy to take time.

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Related Research

• As COVID-19 Cases Increase, Global Air Traffic Recovery Slows, Nov. 13, 2020
• Resolution Of The Qatar Dispute To Improve Political And Economic Cooperation In The GCC Region, Jan. 7, 2021
• Twin Shocks Of Low Oil And COVID-19 Mean Double Trouble For GCC Corporates, July 21, 2020
• GCC Economic Activity Held Back By Its Hydrocarbon-Heavy Economic Structure And OPEC-Related Production Cuts Dec. 7, 2020
• S&P Global Ratings Revises Oil And Natural Gas Price Assumptions, Sept. 16, 2020