Dubai: The cumulative financing needs of Gulf Cooperation Council (GCC) sovereigns will be in excess of $300 billion (Dh1.1 trillion) between 2018 and 2021, with the majority of demand coming from Saudi Arabia, according to credit rating agency Standard & Poor’s (S&P).
The funding needs of the GCC region are now growing at a slower pace, thanks to higher oil prices and an improved fiscal situation resulting from government policy responses.
“GCC sovereigns’ combined central government deficit has much improved, and we estimate it will be around $75 billion in 2019 [5.5 per cent of combined GDP], way below the 2016 nadir of $190 billion [16 per cent of combined GDP],” said Benjamin J. Young, an analyst at S&P.
Despite the improvement in fiscal positions this year, the net debt positions of GCC governments have significantly deteriorated since oil prices fell in 2015 and debt-servicing costs now account for a much larger proportion of fiscal revenue.
“Barring any significant fiscal consolidation or sharp rise in oil prices, we do not expect this situation to reverse. We forecast GCC central government balances to remain in deficit until at least 2021. We estimate previous funding needs in 2015-2017 were $450 billion [or 12 per cent of combined GDP], compared with an expected $300 billion over 2018-2021 [5 per cent of GDP],” said Young.$7
$750 billion funding requirements
According to S&P estimates the total funding requirements over 2015-2021 will be around $750 billion. While fiscal imbalances are expected to linger, the oil price has almost trebled from the $29 per barrel (bbl) trough and is currently $80/bbl. S&P assume the oil price will decline to $55/bbl by 2021.
Although many GCC governments have enacted major fiscal consolidation measures, including the introduction of value-added tax, the average GCC fiscal deficit is expected to widen slightly over the forecast period to around 6 per cent of GDP from 5.5 per cent in 2018.
“Our assumption of falling oil prices and higher spending will likely offset planned revenue-raising measures and widen fiscal deficits in both Abu Dhabi and Kuwait. However, the denominator effect of rising GDP should maintain the fiscal deficit at the 6 per cent of GDP level for the region as a whole,” said Young.
Estimates show Saudi Arabia’s deficit makes up the majority of the GCC sovereigns’ expected $300 billion financing needs in nominal terms, but as a proportion of GDP is similar to that of Abu Dhabi and Oman in 2021, at 5 per cent. Kuwait, however, represents 20 per cent of the total, reflecting fiscal deficits widening to about 13 per cent of GDP.
According to S&P, the average GCC central government fiscal deficit is expected to remain broadly stable over our forecast period, at 6 per cent of GDP, and that the average GCC net asset position is projected to eteriorate to 110 per cent of GDP in 2021, from 130 per cent in 2017.
Apart from Oman and Bahrain, GCC governments still have an exceptionally high level of government liquid assets at their disposal.
Funding channels
There are two main mechanisms through which GCC governments can meet their financing requirements namely asset drawdowns or debt. Larger financing needs imply an increase in the annual incurrence of debt, a weakening asset position, or both. Cost will be a major factor in deciding on which course to take. In many cases, it may be cheaper to issue debt than to forego investment earnings on assets.
“A sovereign’s ability to raise funding through debt issuance can also depend on how receptive various markets might be. This can, among other factors, be a product of liquidity conditions in local banking systems and international investors’ appetite for increasing their GCC sovereign exposure over a relatively short space of time. It may also reflect investors’ perception of regional geopolitical risks,” said Young.
