The agency pointed out that interest rates are rising globally, and the Gulf countries are no exception to this statement. Gulf interest rates have increased since the beginning of 2022 and are expected to increase further, as central banks in the region follow the path set by the Federal Reserve’s increase in interest rates. The US dollar, because the Gulf currencies are linked to the dollar for all countries in the region except for Kuwait, whose currency is linked to a basket of currencies that also includes the dollar.
Most of the revenues of governments in the region are derived from the sale of oil and gas, which are priced in dollars, and increasing interest rates will reduce interest coverage and reduce cash flows, which will reduce the ability of companies to service and repay their debts to varying degrees.
But the agency said that there are some major differences in the type and nature of companies it rates in the Gulf Cooperation Council countries, which are considered balancing factors, particularly the dominance of investment grade ratings and the strong support of governments.
Higher oil prices are also beneficial to the economies of the region, unlike other countries that face slower economic growth due to higher energy costs.
She added that nearly two-thirds of the debts included in the balance sheets of classified Gulf companies have fixed interest rates, because many of these companies can easily and regularly enter the debt markets, which are mostly fixed-rate markets.
Many companies entered the market in 2020 and 2021 when liquidity was high following the outbreak of the Corona epidemic, and most of the debt obtained were granted at interest rates well below the current base rates set by central banks in the region. In all, 45 percent of classified debt is due for repayment after 2026, and maturities until then are evenly distributed.
Most of the companies classified as investment grade in the GCC countries have strong interest coverage ratios, and this provides them with financial reserves to withstand the increase in interest rates during 2022 and 2023.
In addition, many companies in the GCC countries have entered into hedging agreements that will provide more protection as interest rates rise. However, these companies will be subject to higher interest costs when the hedge expires or when they borrow new debt for refinancing or growth.
The agency expects investment-rated companies to maintain very strong interest coverage ratios despite the increase in interest rates. This is because many of them have very little debt or very strong cash flows, especially those companies operating in the oil and gas or chemical sectors. It is noteworthy that these companies benefited from the rise in commodity prices during 2021, which greatly enhanced the generation of cash flows.
The agency asserts that it has tested the companies it rates under a scenario in which the costs of floating-rate debt rise by 400 basis points to assess their ability to service debt at higher borrowing rates. “Our scenario did not take into account the debt maturity schedule or effective hedges in place.”
“We first estimated the cost of debt increase by 400 basis points per company based on the 2021 reported cost of debt for the floating component of its capital structure. We then assessed the company’s ability to service debt equally, on a pro forma basis based on 2021 earnings.”
But companies classified in the Ba and B categories will suffer more due to higher interest rates. However, the agency expects the increase in interest rates to be offset by an improvement in its operating performance as their domestic economies benefit in part from higher oil prices, as Kuwait, Oman and Saudi Arabia are reaping the benefits of higher oil prices, which we expect will improve their revenues and generate cash flows.
Since the beginning of 2022 for companies rated by the agency, interbank rates in the GCC have increased by more than 250 basis points in Saudi Arabia and the United Arab Emirates and more than 120 basis points in Qatar, Kuwait and Oman.
More importantly, Gulf companies have some advantages that distinguish them from companies in other regions because 67 percent of these companies in the GCC are investment-grade companies, have strong balance sheets and have recovered from the effects of the Corona virus, especially in sectors such as oil, gas and chemicals and real estate.
Several companies entered the market in 2020 and 2021 when liquidity was high after the outbreak of the Corona epidemic and most of the debt raised was subject to interest rates well below the current base rates set by central banks in the region.
Because of this wave of refinancing, companies classified in the GCC have staggered maturities, with only 10.4 percent of the debt due in 2022 and another 13.0 percent due in 2023, while 45 percent is due after 2026. This will give companies time Sufficient to reduce operating expenses and improve capital before re-borrowing at higher rates.
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