Dubai: Sovereign borrowings by GCC governments are set to surge in 2019, largely driven by higher spending needs in the context of lower oil revenues.
“Attending to growing financing needs in a lower oil price environment will drive the GCC states to increasingly diversify their sources of financing, with favourability towards issuers tapping international bond markets likely in 2019,” said Ehsan Khoman, Head of MENA Research and Strategy, MUFG.
Last week Saudi Arabia said it plans to issue around 120 billion Saudi riyals ($32 billion; Dh117.2 billion) of bonds next year to help finance its deficit.
Saudi finance minister Mohammad Al Jadaan told Bloomberg TV last week that the kingdom planned to issue international bonds in dollars and other currencies, with the exact timing dependent on market conditions.
“We now have access to a wider network of investors in the US, which is the primary market, but also in Europe and Asia,” Al Jadaan was quoted as saying.
Saudi Arabia unveiled a 1.11 trillion riyal ($295 billion) budget last week, projecting a 4.2 per cent deficit. Many analysts say the deficit could be much higher, with some analysts forecasting that it could be in excess of 7 per cent.
“We believe that the budget’s revenue assumptions are optimistic, especially on the oil front. We estimate that the 2019 budget is likely based on an oil price of around $70-71 [Dh257.11 to Dh260.78] per barrel in Brent crude terms if oil production remains around 10.2 million barrels per day [the target level from January], with the budget break-even oil price set to rise to about 91.9 per barrel,” said Monica Malik, Chief Economist of ADCB.
“We estimate that the fiscal deficit will widen to around 7.6 per cent of GDP in 2019 from 4.6 per cent in 2018.”
Sharp rise in issuance
GCC witnessed a sharp rise in sovereign debt issuance in 2016 and 2017 following lower oil prices. However, overall issuances were lower in 2018 thanks to the fiscal tightening of previous years and higher oil prices.
According to credit rating agency Standard & Poor’s, 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.
Combining this with higher spending plans by Saudi Arabia is likely to alter the deficit spending outlook of the GCC.
Less price sensitive
Although many GCC states such as the UAE, Kuwait and Qatar that are expected to register fiscal surpluses next year, these are likely to tap the market in 2019, if market conditions are favourable.
Given its huge budgeted financing needs, analysts say Saudi Arabia is likely be less price sensitive.
“Given the optimistic revenue projections, the [Saudi] government will need either to raise its deficit projections or lower spending and revise down its GDP growth forecast. We expect the government to opt for higher spending at the expense of missing its deficit target,” said Ziad Daoud, Chief Middle East Economist, Bloomberg Economics.
S&P projects the cumulative financing needs of Gulf Cooperation Council (GCC) sovereigns to be in excess of $300 billion (Dh1.1 trillion) between 2018 and 2021, with the majority of demand coming from Saudi Arabia.
Apart from Oman and Bahrain, GCC governments still have an exceptionally high level of government liquid assets at their disposal.
Two main mechanisms
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 S&P’s Young.