Credit outlook darkens for non-financial companies, Moody's says

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By Juliette Portala

(Reuters) - The outlook for credit conditions next year for non-financial companies in Europe, Middle East and Africa is negative, credit rating agency Moody's (NYSE:MCO) said on Monday, as financing conditions degrade and energy and wage costs loom.

After more than a decade of ultra-loose monetary policy, financing conditions are tightening, inflation is rising and the global economy looks poised to fall into its first recession since 2009.

"Higher interest rates will cause financing conditions to deteriorate and will weaken liquidity and credit quality," Moody's said. This could compel many companies to focus on cash conservation by curtailing shareholder returns and debt-funded M&A.

The agency also pointed to weak consumer sentiment and lower household purchasing power, which will hit demand in 2023 across most consumer-driven sectors and some industrial segments such as chemicals, construction and autos.

"Sectors reliant on discretionary demand will be hit hardest," Moody's noted. It however expects telecoms and gaming to be resilient and airlines to continue to recover from the pandemic.

"The conflict between Russia and Ukraine remains a key geopolitical risk," it added, as Moscow's cut in gas exports in retaliation for Western sanctions has left Europe and other regions scrambling to plug the energy gap.

Although supply constraints will ease, energy scarcity will keep squeezing margins, the agency said, but high power prices will support credit ratios of oil and gas companies.

It highlighted the possibility of rising wage inflation, which some businesses, including retail, hospitality and leisure, will suffer disproportionately, fuelling tensions in labour relations.

Plans by European companies to increase wages and pay one-off bonuses have caused concerns among investors after costs for companies in the euro zone surged 43.3% in the year to August, based on the EU's statistics office Eurostat.

Moody's forecast real gross domestic product growth for G20 economies of 1.3% next year, down from an estimated 2.5% in 2022.