DUBAI: Low oil prices will constrain the amount of funding available to Gulf sovereigns and banks to support the region’s substantial infrastructure bill in coming years, according to rating agency Standard & Poor’s.

To pay for its infrastructure spending, the Gulf countries may have to look at innovative forms of finance in the context that sovereigns as well as the region’s banks will have fewer resources at hand to support the infrastructure roll-out plan over the next years — especially if oil prices decline further or remain low for longer.

S&P estimates that Gulf sovereigns’ capital spending over the next four years will be $480 billion (Dh1.76 billion), of which about 60 to 70 per cent will go to infrastructure projects. Gulf government spending on projects alone including infrastructure contracts awarded over the period 2016-2019 could be about $330 billion. About $50 billion out of this is expected to be spent on projects will be allocated specifically for infrastructure. The difference between estimates of capital spending on projects and project contracts is awarded huge.

“We project a gap as large as $270 billion through 2019 between capital spending for projects by Gulf sovereigns and project contracts awarded, and a difference of $50 billion for project contracts awarded in the infrastructure sector,” said Standard & Poor’s credit analyst Karim Nassif.

Given the large need for infrastructure funding, the rater thinks that governments may choose to either borrow more directly or through government related entities (GREs) or turn to more financially innovative solutions. “This is one reason why Gulf countries are starting to look at alternatives such as public-private partnerships (PPPs,” said Nassif.

Despite the challenges faced on the revenue front, Gulf governments are protecting capital spending as a share of overall expenditure to support growth and further their diversification strategies. At the same time, governments are also cutting in areas where they can afford to. Saudi Arabia, for example, reduced its 2016 transport and infrastructure budget by 63 per cent from the previous year.

The countries with the most significant investments over the next four years will be Saudi Arabia, the UAE, Kuwait, and Qatar, which combined represent around 92 per cent of total capital spending across GCC. These figures do not include spending outside the budget or programmes including housing, public transport and infrastructure.

Given the fewer resources available to banks to support the region’s infrastructure roll-out plan over the next four years, especially if oil prices decline further or remain low for longer, analysts expect alternative funding plan through public private partnerships or GREs raising funds from a variety of sources.

“Governments have started to tap into their assets and we expect them to borrow more to finance their fiscal deficits, partly so that they can support ongoing strategic projects that cannot easily find financing,” said Nassif.

S&P expects domestic debt issuance will be big component of funding for infrastructure projects. Saudi Arabia started issuing domestic debt again last year. Throughout the Gulf, sovereign issuance increased to $53 billion in 2015 from just $14 billion in 2014, despite steady bank issuance and a halving of corporate and infrastructure issuance over the same period. This increase drove the overall increase in the region’s capital market issuance across all sectors to $76 billion last year from $45 billion in 2014.