Leading ratings agency Moody's has changed its 2021 outlook for the companies in the UK and Europe, Middle East and Africa (EMEA) region to 'stable' from 'negative' based on the expectation that business conditions can’t get any worse and for some sectors might actually get better next year.
Sectors like tourism, airlines, hotels, and leisure will continue to take an earnings hit from lockdowns and social distancing into 2021 and possibly beyond, but others like manufacturing and retail are on the path to recovery, it cautioned.
"Stabilising our 2021 outlook for EMEA non-financial companies, as a whole, reflects our expectation that the economic environment and earnings across most industries will be no direr, and in some cases better than in 2020, although starting from a very weak base," explained Richard Morawetz, the VP, Senior Credit Officer at Moody’s Investors Service.
"That said, higher debt will be a key legacy of the pandemic, with companies likely to repay some debt with cash reserves when the business environment normalises," remarked Morawetz.
Governments phasing out their support will be a major challenge for the most affected sectors like airlines and tourism, with their ability to withstand any funding cutbacks determined by the pace of their earnings recovery.
The trend to online retail has been accelerated by the pandemic and will also have longer-term knock-on implications for commercial real estate.
Many EMEA companies have borrowed heavily to survive the pandemic, but its lingering effects could still lead to defaults, which reached a ten-year high of 32 across EMEA in 2020 (YTD November), stated the Moody's report.
Following many negative sector outlooks mid-year driven by the Coronavirus pandemic, most have now been stabilised as there is a general expectation of stronger sales and earnings in 2021 compared to 2020, stated Moody’s in its newly published report.
The default rate is expected to peak at nearly 6% in March 2021 before falling back to around the current level of 4.2% in October 2021. Currently at a 10-year high, the default rate is expected to stabilise next year, it added.
Morawetz pointed out that companies in the GCC countries benefit from strong links to their respective governments, a high level of state ownership and entrenched market positions in sectors such as oil, telecoms and utilities.
"Government-owned oil companies will continue to pay dividends to support state fiscal balances," he added.
According to Moody's social risks will be a definite longer-term effect of the pandemic with the resulting demographic shift creating both challenges and opportunities across different companies (e.g. retailers) and sectors.-TradeArabia News Service