GCC to tap funds, raise debt

Wider fiscal deficits will lead to higher debt and drawdowns of fiscal reserves Krisjanis Krustins,

Analyst at Fitch Ratings

The UAE, Kuwait and Qatar have ample reserves and generally lower debt levels to withstand the weak oil price environment Monica Malik,

Chief economist at ADCB

dubai — The GCC countries will massively tap their fiscal and sovereign wealth reserves to the tune of half-a-trillion dirhams to cover this year’s budget deficit brought on by low oil income and to offset the impact of coronavirus, says a report.

Fitch Ratings expects around $140 billion (Dh513.8 billion) in drawdowns from fiscal reserves and sovereign wealth funds by GCC countries in 2020 compared with only about $10 billion last year.

The region will also raise an additional $48 billion (Dh176 billion) in foreign debt this year, the report said.

“Wider fiscal deficits will lead to higher debt and drawdowns of fiscal reserves.

In 2020, we expect the GCC funding mix to shift in favour of drawdowns from fiscal reserves. We anticipate that the GCC to issue around $48 billion in foreign debt this year, of which $30 billion has already been issued, roughly in line with last year,” said Krisjanis Krustins, analyst at Fitch Ratings, said.

The reserve drawdown is likely to be led by Kuwait, Saudi Arabia and Abu Dhabi.

“For Abu Dhabi, Kuwait and Qatar, sovereign wealth fund assets will remain sufficient to cover years of spending and nearly a decade in non-oil deficits, although in Kuwait’s case accessing the bulk of SWF assets will require parliamentary approval. Economic contraction will even increase the headline ratio of sovereign net foreign assets to GDP,” Fitch Ratings said.

Fiscal deficit to swell

Monica Malik, chief economist at Abu Dhabi Commercial Bank, also said GCC funding requirements will rise significantly in 2020 as fiscal deficits widen.

“Saudi Arabia still has buffers, although will find it hard to make progress with its transformation plan with the lower oil price outlook. The UAE, Kuwait and Qatar have ample reserves and generally lower debt levels to withstand the weak oil price environment. Nevertheless, among the stronger sovereigns in the region, Kuwait is forecast to see a marked deterioration in its fiscal position with oil income dominating revenues,” she said in a recently-issued note. Fitch said oil production cuts announced by some of the GCC nations this week will deepen their fiscal deficit and hinder growth in 2020, according to Fitch Ratings.

“We now expect most GCC sovereigns to post fiscal deficits of 15 to 25 per cent of GDP in 2020, with only Qatar’s deficit staying in the single digits at eight per cent of GDP. This assumes an average Brent oil price of $35 per barrel and full compliance with the Opec+ deal to limit production. This also assumes that the additional cuts announced by Saudi Arabia, Abu Dhabi and Kuwait will last until the end of the year,” said Krustins. Earlier this week, Saudi Arabia announced another one million barrels cut in daily output, which was followed a smaller cuts from the UAE and Kuwait at 100,000 and 80,000 barrels per day, respectively. Fitch predicted oil output will fall by about 10 per cent relative to 2019.

For the regional countries, most fiscal break-even prices are in the $65 to $75 per barrel range, although Qatar and Bahrain are outliers at about $53 a barrel and $94 a barrel, respectively.

A further $10 per barrel decline in average prices would increase deficits by four to six per cent of GDP. While five per cent cut to oil production would widen fiscal deficits by one to two per cent of GDP.