Large GCC corporations likely to raise funds from debt markets, Moody's says

Companies including quasi-government entities will increasingly look at capital markets

Saudi Aramco added new members to its board as it prepares for an IPO. Hamad I Mohammed / Reuters

Large Arabian Gulf corporations, including sovereign-owned firms, will likely tap capital markets over the next five years, in the wake of structural reforms by the governments coping with the oil price slump , Moody's Investors Service said.

"GCC non-financial corporates in mature and capital intensive sectors... are likely to access debt markets more and more to fund capital investments, while others are exploring options to diversify funding sources to reduce reliance on domestic banks," Rehan Akbar, a vice president and senior analyst at Moody's said in a report released on Tuesday.

These sectors include oil and gas, refining and petrochemicals, utilities, real estate and infrastructure.

Governments in the six-member economic bloc of the GCC have largely met funding needs of quasi-government companies in the past. The  Gulf states, which are trying to implement economic reforms to cut their dependence on oil revenues, are now encouraging these companies to secure funding through capital markets. A number of regional energy companies including Saudi Aramco, the world's biggest oil producer, and state-controlled Abu Dhabi National Oil Company have already tapped international debt capital markets in recent months.

Measures such as taxes and removal of fuel and utility subsidies are fanning inflation and putting a varying degree of pressure on corporate profits, Moody's said. Elevated regional geopolitical risk has also increased the complexity in the business landscape and is likely to dampen investor sentiment. For example, the Saudi Arabia-led trade boycott of Qatar has negatively impacted companies in Doha, where real estate, contracting and hospitality firms in particular are facing pressure.

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Most regional corporates rated by Moody'sremain "fundamentally healthy", however, further pressure on sovereign credit quality could begin to act as rating constraints for these companies, the agency said. Negative rating outlooks on Qatar, Oman and Bahrain suggest a higher probability of downward pressure in these markets compared to those in the UAE, Kuwait and Saudi Arabia where the sovereign outlooks are stable, it noted.

With fewer organic growth opportunities available in the GCC corporate sector, Moody's expects rising industry consolidations and international acquisitions -- examples of which have already been seen in the telecom, petrochemical and real estate sectors. The rating agency said companies are likely to increase investments in vertical integration and cut costs as they adjust to the new business environment in the region.