Dubai: The prospect of persistently low oil prices has fundamentally altered the fiscal outlook of GCC countries resulting in higher borrowing costs for regional sovereigns, the International Monetary Fund (IMF) said in a report ‘Learning to Live with Cheaper Oil’.
Some credit rating agencies have revised down the sovereign credit ratings of several countries such as Bahrain, Oman, and Saudi Arabia. In May this year, Moody’s downgraded Saudi Arabia (to A3), Oman (to Baa1) and Bahrain (to Ba2). In early February, S&P had downgraded short-term foreign- and local-currency sovereign credit ratings on Saudi Arabia to “A-/A-2” from “A+/A-1” with a stable outlook Bahrain to “BB/B” from “BBB-/A-3 and Oman to “BBB-/A-3” from “BBB+/A-2” with a stable outlook.
In keeping with lower ratings and or negative outlook, the government bond yields and sovereign credit default swap (CDS) spreads have increased in several countries, although they have fallen recently as oil prices increased from their early-2016 lows.
In the GCC countries, interbank rates have increased following the US Fed rate hike—consistent with the GCC fixed exchange rate regimes — although in some GCC countries, interbank rates have increased by a larger amount than the Fed hike owing to tighter domestic liquidity. Budget deficits are being financed with a mix of asset drawdowns and debt issuance. Many governments withdrew some of their deposits from the local banking system, central bank, or sovereign wealth funds. In some cases, governments also borrowed from local banks.
International bonds
The use of international bonds, for instance, by Bahrain,Qatar, and Abu Dhabi, and syndicated loans by Oman, Qatar, and Saudi Arabia, have been less frequent until recently.
After significant withdrawals of financial savings last year, some countries may issue more debt this year. However, the exact composition of financing is highly uncertain. The IMF estimates that if policymakers decided to finance half of their deficits by issuing debt, the total issuance would reach close to $100 billion, given the sizeable projected deficits.
“When considering the right financing strategy, policymakers need to strike a balance between drawing buffers, issuing domestic debt — thus helping catalyse the development of domestic capital markets, but potentially crowding out private investment—and borrowing abroad. The preferred financing mix will depend on country circumstances,” the IMF report said.
