S&P Global Ratings believes that most GCC corporate and infrastructure firms benefit from broadly supportive credit conditions in their domestic markets. This is despite soft global economic growth, high interest rates, and considerable geopolitical risks in the Middle East. More than 95% of our outlooks on rated GCC corporate and infrastructure firms are stable, attesting to our view that ratings will remain resilient in 2024. However, this also means that we will see limited rating upside this year.

We expect rated GCC corporate and infrastructure firms to be able to withstand higher refinancing needs and interest costs in 2024. This is thanks to an improvement in operating performance from 2023, notably for oil, gas, and chemicals companies, but also to continued growth in the non-oil sectors. In addition, the level of absolute reported debt across GRE and non-GRE issuers in the region is relatively stable. Aggregate reported debt hardly changes under our base-case scenario in 2024 and 2025, despite sizable spending needs. At the same time, we estimate that rated GCC companies' aggregate EBITDA will increase by about 5%-10% in the next two years.

We will continue to monitor how EBITDA interest coverage ratios evolve for the most leveraged companies at the lower end of the rating spectrum, or those that need to refinance a large portion of their capital structure in 2024. Rating pressure could arise for companies operating in cyclical sectors and making large investments if this leads their leverage metrics to increase.

The Operating Environment Is Supportive

The common theme across the GCC region this year is increased oil-related real GDP growth thanks to tapering OPEC+ cuts from the first quarter of 2024, supported by growth in the non-oil sector. We expect the GCC economies to grow by 2%-3% on average in 2024, benefitting from relatively benign oil prices (see chart 1). We assume an average Brent oil price of $85 per barrel in 2024 and 2025, supporting the cash flows of national oil companies, as well as the companies along their value chains.

Non-oil economic expansion will continue at a rate of slightly less than 5% in Saudi Arabia and the United Arab Emirates (UAE), propelled by sizable investments in economic diversification and population growth of about 2%-4% across the GCC in 2024. The non-oil sectors continue to benefit from high public spending as part of various economic development programs, such as Vision 2030 in Saudi Arabia, as well as consumer spending growth buoyed by positive sentiment, albeit at a slower pace than in 2023. At the same time, regional governments will compete to attract new businesses, considering their need to create new jobs for the younger generations and tightening requirements for private companies' employment of GCC nationals.

We expect GCC infrastructure assets to remain resilient to market risk over 2024, as they often have long-term concessions that fully mitigate this risk. Furthermore, project finance risk allocation typically protects companies from changes in law, currency exchange rates, inflation, and interest rate risks. In addition, most of the rated projects are GREs, reflecting the strong role that governments play in the region's economic activity. The sovereigns' strong credit profiles and our expectation that they would support the GREs underpin our high ratings on these entities.

Chart 1

We expect oil, gas, and chemicals companies' earnings to rebound in 2024

We forecast average aggregate EBITDA growth of about 5%-10% for rated GCC companies in 2024 and 2025, outpacing real GDP growth. This compares with an estimated dip of about 5%-10% in 2023 from 2022. The dip reflects a weaker performance in the oil, gas, and chemicals sectors (65%-70% of aggregate GCC corporate EBITDA) in 2023, due to lower commodity prices in the petrochemicals sector and the normalization of fertilizer prices. We expect that this sector will benefit from a recovery in pricing momentum in 2024 and companies' expansion plans. For the national GCC oil companies, we expect an increase in upstream capacity to continue to drive investments, while they maintain relatively strong balance sheets (see table 1).

We anticipate that demand for the petrochemicals industry will remain subdued until the second half of 2024. We also expect continued oversupply in the industry, albeit improving from 2023 levels. We believe that rated GCC chemical producers' leading positions, low-cost competitive advantage, and healthy balance sheets should mitigate inflationary pressure and rising borrowing costs. Even with the recent announcement of higher feedstock prices for Saudi chemical producers, we do not expect a materially negative impact on profitability (see "Saudi Chemical Producers' Credit Metrics Can Withstand A Possible Feedstock Price Hike," published June 12, 2023).

Table 1

Non-oil sector earnings will grow by about 7% in 2024, down from 15% in 2023

We expect rated non-oil companies' earnings to have grown by about 3%-4% in Saudi Arabia and 5%-15% in the UAE in 2023, boosted by mergers and acquisitions and momentum in the real estate market. The continued growth, although lower than in 2023, reflects regional governments' efforts to diversify their respective economies away from hydrocarbons.

Steady growth in international tourism and positive demographic trends will resonate across multiple sectors in the GCC region, including hospitality, retail, and airlines. The most recent data signals that the number of international visitors is on track to exceed 2019 figures in Saudi Arabia, the UAE, and Qatar. We expect health care, education, food and beverage, and leisure operators to capitalize on population growth, as low reported inflation of 1.5%-2.0% will sustain consumer spending. It is difficult to predict how the geopolitical situation will play out, and this could pose some risks to our forecasts (see table 2).

Table 2

Sustained demand for real estate in the UAE and large Saudi cities has led to significant price increases over the past two years, benefiting real estate developers' credit quality. We think that the risk of a cyclical price reversal has increased in Dubai, while demand in Saudi Arabia will continue to see the negative effects of higher mortgage rates and less affordable properties. The possibility of interest rate cuts from the second half of 2024 could provide some relief, although we think this will be marginal.

We expect to see some growth in new businesses in the UAE and Saudi Arabia. In the UAE, this is thanks to new rules that allow 100% foreign ownership of certain onshore companies, new longer-term accessible visas, and other beneficial regulations. In Saudi Arabia, it is thanks to the Regional Headquarters Program, effective from Jan. 1, 2024, which requires companies that have contracts with government agencies to have regional headquarters in Saudi Arabia. A new premium residency visa launched in January 2024 in Saudi Arabia will further support new businesses and population inflow. Overall, this will continue to encourage new job creation, with positive ramifications for consumer-driven sectors (see table 3).

Table 3

Infrastructure investments shift toward clean energy

For the next five years, we expect heightened activity in the renewables sector. While the GCC region still very much depends on fossil fuels, we are starting to see an increase in sustainable energy solutions, with a shift toward investments in clean energy as countries aim to reduce their dependence on oil and gas and enable future exports of clean energy. We also expect a significant pipeline of new reverse-osmosis water desalination plants in the region, as they use less energy than thermal technology. For instance, Abu Dhabi aims to satisfy more than 90% of water demand from reverse-osmosis plants by 2030. We believe that the GCC region is in a good position to be part of the global energy transition thanks to its access to both capital and abundant low-cost renewable energy.

Following COP28, GCC countries increased their decarbonization targets and allocated significant capital. As one of the largest sources of emissions, the power sector looms large in most national plans for decarbonization. The UAE has launched a $30 billion fund dedicated to the energy transition, while Abu Dhabi National Oil Company (ADNOC; not rated) has announced a revised budget of $23 billion, up from $15 billion last year, to develop its carbon management platform domestically and abroad.

In Saudi Arabia, the Ministry of Energy upped its target of renewable generation to 130 gigawatts (GW) by 2030 from 59 GW previously, with the aim of exporting a portion of that extra installed capacity in the form of green hydrogen, similar to what the Neom Green Hydrogen project, the world's largest commercial hydrogen facility, has achieved. We expect this renewable agenda alone to require about $90 billion of funding.

Alongside the energy sector, we also see significant investments in transportation and social infrastructure, as well as in digitalization, with large outlays on connectivity and a doubling of data center capacity as the region's population continues to grow. Riyadh and Dubai expect to nearly double their populations by 2030 and 2040, respectively (see table 4).

Table 4

Geopolitical Tension Is A Source Of Risk

The current geopolitical tension and its potential escalation, although this is not our base case, could affect regional market sentiment, adding to sticky global inflation and possible delays in interest rate cuts. We think that companies operating in oil and gas, tourism, shipping, and the retail and automotive supply chain sectors could face some operating weaknesses if conditions take a turn for the worse. Heightened geopolitical risks could also affect consumer confidence, leading to lower spending and real estate demand.

Red Sea disruptions should be manageable for rated oil and gas companies in the GCC, at least for now. That's because most GCC hydrocarbon exports flows to Asia. Therefore, a full or even partial closure of the Strait of Hormuz would be a much bigger risk (see "Red Sea Disruptions: Impact on Rated Qatari Entities Exposed To Oil And Gas," published Jan. 25, 2024).

Most GCC Companies' Credit Metrics Are Improving Despite High Spending

Expansion plans in the oil, gas, and chemicals sectors will keep aggregate capex high. These plans aim to boost upstream production capacity in the next five years, such as the North Field South and East expansions in Qatar. We project that aggregate capex for the rated corporate portfolio will remain between $45 billion and $50 billion on average between 2023 and 2025. This compares with $49 billion in 2022, but is about 50% higher than before the COVID-19 pandemic in 2019. Close to 90% of this relates to spending by GREs (see chart 2).

In addition, we believe that government initiatives such as Vision 2030 and subsequent projects should perpetuate Saudi companies' spending needs, notably in the downstream and telecoms and utilities sectors, but also across the private sector in general. With ongoing social reforms and favorable demographics, we see investment opportunities in health care, education, and tourism across the region (see chart 3).

Chart 2

Chart 3

Rated GCC companies will focus on balance sheet management

The companies in the region benefit from fairly strong balance sheets and continued access to capital, despite higher spending plans. We expect S&P Global Ratings-adjusted debt to EBITDA to improve across sectors on average over the next two years. Support will largely come from resilient profitability margins, and likely lower working capital needs as input costs stabilize, especially in the commodity chemicals sectors. This, in turn, should support cash flow generation.

We expect GREs in the energy and telecoms sectors to have the lowest leverage (see chart 4). In contrast, we expect companies in the transportation sector have the highest leverage, partly due to debt-funded acquisitions (see chart 5). We also expect deleveraging across non-GRE companies over 2023-2025, mainly as a result of higher profits, although this shouldn't have a meaningful impact on the overall trends in the rated GCC portfolio given the lower contribution.

Dubai-based residential real estate developers have accumulated high cash balances over the past two-to-three years, putting them in a strong position ahead of the cyclical slowdown that we expect over the next 12-18 months. They will continue to generate solid cash flows as presales will remain healthy in 2024, thereby offsetting funding requirements for land acquisition and construction. Some have also capitalized on the favorable sector trends to pay down debt.

Chart 4

Chart 5

Sizable capex and dividends weigh on discretionary cash flow

We expect credit metrics to remain broadly stable or slightly improve in 2024-2025. We anticipate that absolute reported debt will rise marginally by $2 billion-$4 billion per year over 2024 and 2025, mainly due to high capex needs and dividend distributions largely from large GREs (see chart 6). However, EBITDA growth will keep leverage commensurate with the current ratings.

Chart 6

Mergers And Acquisitions And IPOs In The UAE And Saudi Arabia Will Be Buoyant

In 2023, we saw a number of merger and acquisition announcements by GCC companies in the telecoms, transportation, and oilfield services sectors. These focus on international investments and are a good fit with strategic objectives. GCC telecoms companies have resumed acquisitions after a few years of relative calm. Stable regulatory frameworks and currencies in Europe make acquisition targets there attractive investment opportunities for financially solid GCC telecoms companies, which we believe will continue to expand into new markets.

UAE-based e& and Saudi Telecom Company (stc) have acquired minority stakes in listed European telecoms companies Vodafone Group PLC and Telefonica S.A. They have also invested in other European telecoms companies, specifically, e&'s acquisition of telecoms assets from PPF Telecom Group B.V., and stc's acquisition of a towers infrastructure company from United Group. e& has also expanded its footprint in Pakistan following the announced acquisition of Telenor Pakistan (Pvt) Ltd., but ended discussions to increase its stake in Mobily in Saudi Arabia.

The slew of asset monetization through IPOs continues in Saudi Arabia and the UAE, albeit at a slower pace than in 2022. In 2021 and 2022, the trend was for GREs to conduct IPOs, such as ADNOC's subsidiaries. In 2023, we saw a shift toward private company listings, particularly in Saudi Arabia, and across both the main market and parallel equity market Nomu.

We expect sustained IPO activity in 2024, with five private companies having announced potential listings in Saudi Arabia as of January (see table 5), and with additional GREs possibly planning to list in Dubai. This is mainly because in 2022, the government committed to listing 10 GREs, and only five of these have been listed so far, including Dubai Taxi in December 2023. Dubai-based public parking operator Parkin Company's listing was recently announced and is due to take place in March 2024.

We see increased participation by institutional investors and stock market listings as supportive of governance practices, particularly financial reporting and transparency, as listed entities have more stringent regulatory requirements. What's more, we see companies' ability to diversify their investor bases and reduce their dependence on bank borrowing as supportive of their funding profiles. Debt capital market activity in Saudi Arabia continues to accelerate (see "Saudi Arabia's Debt Market: Ready For Takeoff," published on June 19, 2023).

Table 5

Liquidity Is Key, Especially For Smaller Companies

Most of the rated companies that need to refinance are in Saudi Arabia, the UAE, and Qatar (see chart 7). We think that the maturity wall is manageable for these issuers, as they have comfortable liquidity positions despite changing funding needs in the context of elevated capex. As most of the maturing debt sits at GREs, we view the refinancing risk as lower than it would be otherwise.

However, for the broader market, the changing funding landscape could prove challenging. More specifically, as government initiatives drive investments, we anticipate that capex will grow faster than cash flow generation. This could erode liquidity buffers, potentially pressurizing companies that rely on issuance.

Additionally, we assess that about 90% of our rated GCC companies--of which 40% are the GREs of highly rated sovereigns--have adequate liquidity or stronger (see chart 8). Excluding the GREs in our portfolio, we calculate that about 15%-20% of the non-GREs have less than adequate liquidity, meaning that sources of liquidity over the next 12 months do not significantly exceed uses for the same period.

These non-GREs include companies whose business operating models expose them to high amounts of short-term debt relative to total gross debt. This is the case for Mekdam Holding, for example, or companies that operate with high leverage and have full exposure to higher floating interest rates. These interest rates could, in turn, pressurize free cash flow generation and overall liquidity.

As a result, we think that issuers refinancing over the next 12 months, particularly non-GREs, could face challenges. Despite our expectation of a slight deterioration in asset quality, we expect that rated GCC banks to continue to report strong profitability, thanks to good net interest margins and generally lower-cost business models. For Saudi banks, tighter liquidity and the migration of deposits into interest-bearing deposit accounts have reduced the benefits of higher rates in 2023.

We expect strong but slower credit growth of 8%-9% for Saudi banks in 2024 due to lower growth in mortgage lending and tighter liquidity. Corporate lending will drive the growth, benefitting from Vision 2030 projects. Qatar is another country to watch, as external debt remains high and is migrating toward more volatile interbank instruments. We expect subdued growth in Qatar due to lower government capex.

Chart 7

Most of our rated infrastructure assets in the GCC region have been financed with limited recourse to their respective sponsors. It is common for project debt to have high interest rate-hedging covenants to shield the companies from market movements. All our rated projects benefit from either a fixed-coupon bond or a combination of a fixed-coupon bond and hedged commercial debt. Therefore, we do not foresee high interest rates creating cash flow stress for our rated projects.

In the infrastructure sector, we do not envisage liquidity constraints in the short term, especially as most projects have a strong government backstop, which makes them attractive to local and international banks looking for long-term yields.

Funding Costs Are On The Rise

We calculate that in aggregate, rated GCC companies will need to refinance or repay $18 billion-$20 billion of debt in 2024 and about $8 billion-$9 billion in 2025, compared with $9.7 billion in 2023. This could boost debt capital market activity. We calculate that GRE debt maturities comprise 75%-80% of 2024 maturities and about 55%-60% of 2025 maturities, versus 80%-85% in 2023 (see chart 9). As a substantial part of the capital structure needs to be refinanced, funding costs will rise substantially.

We do not think that this poses a great risk to most of our rated issuers, but smaller players with weak EBITDA generation capacity may struggle to absorb the extra costs without moderating capex or dividend payments. Hence the importance in 2024 and 2025 of EBITDA interest coverage ratios, which we will monitor carefully in the context of higher interest rates (see chart 10).

Chart 8

Chart 9

Chart 10

As long-term yields fall--we forecast that the ten-year U.S. dollar rate will drop to 3.26% in 2025 and 3.05% in 2026--we are seeing infrastructure issuers coming back to the market to evaluate their refinancing options. It is rare for these issuers to have firm obligations to refinance their initial loans. We foresee a good appetite among institutional investors for infrastructure assets, although issuers are still hesitant to lock themselves into fixed long-term rates. We expect a rebound in infrastructure issuance in 2024 compared to 2023, which was a muted year for project bonds worldwide.

Appendix: Ratings And Outlook Distributions--GCC Corporates

Chart 11

Chart 12

Chart 13

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