DOHA: The COVID-19 will weigh on the economies of the Gulf Cooperation Council (GCC) region as weakening global demand drags down oil prices and hampers important industries such as tourism and real estate. The effect of the expanding epidemic on global growth has direct implications for the GCC countries, S&P Global Ratings said yesterday in a report published on RatingsDirect.
The publication follows recent revisions to S&P’s oil price assumptions to $40 per barrel in 2020 from $60 previously.
“Weaker global demand will strain GCC economies, and the effect will be amplified by key trading partner concentrations,” said S&P Global Ratings credit analyst Mohamed Damak.
S&P estimates that the volume of vulnerable goods exports ranges from 53 percent of total exports for Oman to about 17 percent for Bahrain.
The GCC’s hospitality industry, which includes sectors like airlines, hotels, and retail, will see lower revenue because of decreased tourism and business flows, as travel aversion and restrictions bite during the peak tourism season.
“Furthermore, across most major bourses, prices have declined sharply and risk aversion has spiked. For the GCC region, this means issuers that have weaker credit quality or significant direct exposure to affected industries will find it difficult to access capital markets,” Damak said.
The knock-on effects of lower economic growth and oil prices will further slow lending growth and increase the overall stock of problem assets (Stage 2 and Stage 3 loans) at GCC banks. At the same time, interest margins will decline. Combined, these shifts will weaken banks’ profitability. Capitalization is unlikely to be affected by these changes and it should continue to support bank ratings. On the funding side, the lower oil price is likely to slow deposit base growth.
Capitalization is unlikely to be affected by these changes and it should continue to support bank ratings. On the funding side, the lower oil price is likely to slow deposit base growth because government and government-related entities still represented 10 percent-34 percent of total deposits on June 30, 2019.The effect of this trend on banks’ funding and liquidity profiles will be tempered by slower expansion in lending. The RatingsDirect report, however, does not constitute a rating action.
