The coronavirus outbreak, which has been declared a 'pandemic' by the World Health Organisation, will expose the weaker borrowers of Gulf Cooperation Council (GCC), S&P Global Ratings has said.
In its report "Prolonged COVID-19 Disruption Could Expose The GCC's Weaker Borrowers' published on Ratings Direct, the S&P said recent revisions to our oil price assumptions are USD 40 per barrel in 2020 from USD 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.
"We estimate that the volume of vulnerable goods exports ranges from 53 per cent of total exports for Oman to about 17 per cent for Bahrain," the report said.
According to the financial research agency, 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 are enforced 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.
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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.
Capitalisation 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. This report does not constitute a rating action.
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