Dubai: Fiscal deficits across the GCC are seen widening further in 2016 despite fiscal reforms and spending retrenchment following the sharp decline in oil prices.
The growing fiscal gap is expected to be covered largely through domestic borrowing programme, which in effect will adversely impact banking sector liquidity across the region, according to a recent report from Abu Dhabi Commercial Bank (ADCB).
“Domestic funding will remain important for covering the GCC’s fiscal deficit in 2016, though a number of member countries have indicated a greater focus on external borrowing. These will include further drawdowns of government deposits in their banking sectors, as well as borrowing from banks,” said Monica Malik, Chief economist of ADCB.
Saudi Arabia sold floating-rate bonds in February 2016, which is widely seen as a move to maintain demand for government debt in a tightening liquidity environment. The Saudi government has been issuing 20 billion Saudi riyals (Dh19.58 billion) of domestic bonds to banks every month from August 2015 to finance the deficit. The Qatar Central Bank cancelled its T-bill auction in January 2016 on the back of weak demand from banks. This was after reducing the amount of T-bills issued at the end of 2016. Domestic bond yields have also risen in Oman.
“The GCC interbank rates have stabilised in early 2016, and to have fallen moderately in the UAE. However, we believe that the overall theme will be one of tightening. However, an expected deceleration in private-sector credit growth in 2016 could reduce the pressure somewhat,” said Malik.
On the external funding side, foreign debt issuances and syndicated borrowing will be important to reduce the drawdown of FX reserves and domestic tightening in the banking sector. With the sovereign downgrades of Bahrain, Oman and Saudi Arabia by the rating agencies, the cost of funding is expected to increase.
In February 2016, S&P downgraded the long-term foreign currency sovereign ratings and outlooks for a number of oil-exporting countries. Within the GCC, the ratings were downgraded two notches each for Bahrain (to BB, below investment grade), Oman (to BBB-) and Saudi Arabia (to A-). Kuwait, Qatar and the UAE, with their stronger fiscal buffers, have not seen any changes to their sovereign ratings.
Sharjah and Bahrain are the only GCC sovereigns to tap the debt capital markets so far in 2016. Bahrain raised $600 million at the end of February, comprising a $275 million, five-year tranche at 5.95 per cent and a $325 million, 10-year tranche at 7.65 per cent. The yields were 25 bps higher than for the (subsequently cancelled) bond that it had been looking to place just before S&P downgraded its sovereign rating earlier in the month.
GCC banks enjoy high ratings, largely from the assumption that they will receive sovereign support in the event of any distress. According to rating agency Moody’s, bank deposit ratings in the GCC countries incorporate an average uplift of four notches from their stand-alone credit profiles, reflecting their assessment of the high likelihood of government support in the event of distress. “Any change in our assumptions of government support for banks could adversely impact ratings,” Moody’s said in a recent note.
