GCC plays key role in Middle East and Africa’s fiscal stability

Dubai: GCC countries have been playing a key role in the fiscal stability of many Middle East and Africa (Mea) region nations, with direct and indirect economic support, according to a recent report from rating agency Standard & Poor’s (S&P).

GCC support to countries in the region comes in the form of aid or non-commercial lending. According to S&P, these sovereigns’ access to bilateral non-commercial financing generally lowers that country’s cost of financing and benefits its debt profile.

“Donor support from the GCC countries to sovereigns in the Middle East and Africa comes in several forms. In general, we view this support as beneficial for the recipient,” said Zahabia S Gupta, an analyst at S&P.

According to S&P analysts, for recipient countries, budgetary grants provide the most flexibility; they are fungible, non-debt-creating, and therefore carry no interest costs.

In general, grants help to reduce government deficits by boosting revenues and support the balance-of-payments position through official transfers. Funding directed towards investment projects are also usually grant-like, meaning there tend to be no or low borrowing costs and no principal repayment.

“Donor deposits in the central bank and currency swaps provide immediate external liquidity and increase foreign exchange reserves, but they also add to the country’s external debt and interest costs, albeit often on concessional terms,” said Gupta.

Historically, GCC countries have extended deposit maturities in several cases. Donors have also provided funding support through concessional loans, which add to government debt but have low borrowing costs and longer maturities relative to market funding.

Emerging risks

Prolonged low oil prices and continuing volatility in the global markets are likely to impact both qualitative and quantitative restrictions on GCC support to regional sovereigns.

“We anticipate that GCC sovereigns will likely prioritise funding to key regional partners in the context of volatile oil prices, weaker GCC net asset positions, and their respective domestic agendas of diversifying their economies away from hydrocarbons,” said Trevor Cullinan, an S&P analyst.

Analyst expect, despite the challenging domestic economic conditions GCC countries with stronger financial positions will continue to support countries such as Bahrain, Oman, and Jordan. This expectation offers additional support for the ratings on these three sovereigns.

There continue to be strong political and economic ties among GCC sovereigns (barring the dispute with Qatar). “More importantly, we believe that GCC countries will strive to prevent contagion effects from pressure on the currency pegs of Bahrain or Oman and spillovers of social and sectarian tensions,” said Gupta.

Despite weaker net asset positions relative to pre-2015 levels due to the drop in oil prices, GCC countries have pledged a large sum of funds to a broader group of countries. Recipient countries are facing myriad challenges including wars, volatile oil prices, and other external shocks. According to S&P analysts, the GCC countries have veered toward a more activist foreign policy and are focused on building political, military, and trade alliances in the Middle East and North Africa region and the Horn of Africa.