Dubai: The sovereign borrowing of GCC (Gulf Co-operation Council) countries is expected to reach $250 billion (Dh917.5 billion) in 2016/17, Moody’s Investor Services said on Monday as tumbling oil prices slash revenues for the commodity dependent economies.

For 2016, the fiscal deficit will likely reach around 12.5 per cent of regional GDP, compared to 9 per cent in 2015, according to the ratings agency, with governments tapping all possible sources to trim the deficit.

“We expect at least 50 per cent [of the deficit] to be financed through drawdowns and reserves and the other half through debt issuances,” Mathias Angonin, analyst with Moody’s told journalists at a news conference.

However, the government has also been resorting to cost cutting, which is likely to constrain growth in 2016 to levels below those recorded in four years even, Moody’s analyst said.

“There is a growing divergence in GCC sovereign grade profiles. The lowest rated sovereigns are going to more affected than higher grade sovereigns,” Angonin said, adding “Overall, GCC sovereign ratings are still at high levels.”

All GCC countries have various level of vulnerabilities due to falling oil prices, and in 2016, growth would slow further, with Saudi Arabia, the biggest exporter of oil, slowing the most. Earlier in the month, Moody’s placed all the GCC countries in the review for a possible downgrade, the first action to be taken by the ratings agency since 2010. The review on a possible downgrade will be concluded by the end of May, with the exception of Bahrain. The ratings agency would be looking at fiscal reforms, private and public sector reforms during its review. The GCC has already decided to implement Value Added Tax by 2018, in one such fiscal measure.


The banking sector is dependent on public sector deposits, which have been sagging and directly impacting liquidity, and that further would impact loan and deposit rates, driving up cost of funding and ultimately impact corporates.

“We are seeing pressures on liquidity and funding channel,” said Khalid Ferdous Howladar, global head - Islamic finance, senior credit officer, GCC banking at Moody’s. However, key projects in UAE and Qatar in the form of UAE Expo in 2010 and the World Cup in Qatar would act as a non-discretionary anchors for expenditure and would create lending opportunities for banks.

Inflow of retail and corporate deposits, which are more sticky, have been coming down dramatically along with deposits from government or related entity deposits.

To fill that funding gap, banks would resort to expensive market funding, which Howladar expects to increase by 5 per cent. “The banks are adjusting to a new normal. They were expecting oil prices to bounce bank and they would go to the market and raise funds, and that hasn’t happened, so as a result, spreads are widening and they will have to adjust to the fact that they would have to pay more going forward,” Howladar said.

Banks are waiting for the sovereign to go the market first for them to create the pricing yield curve for the banks to follow.