Stable outlook seen for GCC firms in 2018

Dubai - GCC economy expected to grow near 2.5 per cent next year

Higher oil prices and continued public spending support the stable 2018 outlook on non-financial companies in the GCC, Moody's Investors Service said on Wednesday.
"Improving oil prices, which are narrowing fiscal deficits, as well as an ongoing commitment to public spending and a supportive stance towards government-related issuers will underpin the stable outlook on GCC companies over the next 12 months," Rehan Akbar, vice-president and senior analyst at Moody's, said in a report.
Analysts pointed out that governments across the GCC are committed to increase public spending just as Dubai announced through its recent expansionary budget with a record spending of Dh56.6 billion. The budget, allocating an increased spending to boost infrastructure efficiency in line Dubai Strategic Plan 2021's targets and future commitments, especially Expo 2020, reflects a strong commitment to social expenditure, including health, education and housing, analysts said.
"Limited clarity on policy direction and on the pace of implementation of structural economic reforms, as well as political risks and high currency volatility drive the negative 2018 outlook for Turkish companies. Similarly, the negative outlook for firms in South Africa reflects continued political and policy uncertainty, and depressed business and consumer demand," said Akbar.
Rated GCC corporates are mainly government-related issuers, which will continue to benefit from strong competitive positions and government support.
Oil prices above $50 a barrel will allow countries with large fiscal buffers and small populations to implement fiscal reforms at a slower pace than their regional peers, which will in turn support the operating environment in these countries. The ratings agency said fewer growth opportunities would drive GCC companies toward consolidations and acquisitions outside the region, as well as investments in increasing vertical integration, and corporate focus on costs. Mature state-owned corporates are increasingly looking to diversify funding sources, which could lead to an uptick in capital market activity.
Oxford Economics said in a report that after two difficult years including a tough 2017 where regional GDP growth is expected to come in at just 0.3 per cent, the GCC economies are set to enjoy their fastest expansion in three years in 2018. "We forecast 2.7 per cent growth for the region next year with all six GCC economies set to enjoy a relatively robust performance," it said.
New forecasts from Moody's Analytics said the GCC region's economy will grow near 2.5 per cent in 2018. Stable energy prices will underpin this growth, with the price for Brent crude oil fluctuating in a tight range of $50-60 per barrel. Chris Lafakis, Moody's Analytics Energy Economist, said the Opec's likely extension of production cuts, coupled with growing oil demand from emerging markets, will lead to a decline in global oil inventories, supporting oil prices in 2018.
"Oil prices will be capped; however, Opec countries may not adhere to production cuts. US shale oil producers will in turn ramp up oil exploration, ensuring that oil trades within a range."
Improved current account positions as a result of replenished oil reserves will support investment in non-oil sectors of the economy as the Gulf countries attempt to diversify away from dependence on hydrocarbons, said Lafakis.
In Saudi Arabia, recent anti-corruption efforts in the country underscore the commitment to the country's Vision 2030 economic transformation programme.
"Regional political instability remains the main risk to the Middle Eastern and North African economies," said Juan Licari, Moody's Analytics chief international economist.
"An increase in geopolitical tensions could escalate the region's refugee crisis, increase government spending on security and undermine investment."
- issacjohn@khaleejtimes.com