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Prolonged COVID-19 Disruption could expose GCC’s weaker borrowers- Report

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

As global financing conditions deteriorate, funding costs for more-leveraged borrowers are rising The high level of uncertainty regarding the duration and eventual severity of the crisis will increase downside risks The knock-on effects of lower economic growth and oil prices will further slow lending growth

By: S&P Global

The effect of the expanding COVID-19 epidemic on global growth has direct implications for the Gulf Cooperation Council (GCC) countries, S&P Global Ratings said today in the “Prolonged COVID-19 Disruption Could Expose The GCC’s Weaker Borrowers,” report published on RatingsDirect.

The publication follows recent revisions to our 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.

We estimate that the volume of vulnerable goods exports ranges from 53% of total exports for Oman to about 17% for Bahrain.

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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,” concluded Mr. Damak.

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.