Gulf sovereigns’ cu­mu­la­tive fund­ing needs seen at $300bn in 2018-21

Gulf Times Business - - BUSINESS - By San­thosh V Perumal

The Gulf sovereigns’ cu­mu­la­tive fund­ing needs will be around $300bn in 2018-21, which is slated to be met through a 70:30 debt as­set pro­por­tion. Qatar and Bahrain are likely to rely more on debt, while Kuwait and Abu Dhabi to bank on as­sets, ac­cord­ing to global credit rat­ing agency Stan­dard and Poor’s (S&P).

“Fund­ing needs in the Gulf Co-op­er­a­tion Coun­cil ( GCC) re­gion are now ac­cu­mu­lat­ing at a slower pace thanks to higher oil prices and gov­ern­ment pol­icy re­sponses,” S&P said, es­ti­mat­ing the GCC sovereigns’ cu­mu­la­tive $300bn fund­ing needs be­tween 2018 and 2021.

High­light­ing that the GCC sovereigns’ com­bined cen­tral gov­ern­ment deficit has much im­proved, the rat­ing agency es­ti­mates it to be around $75bn in 2019 ( 5.5% of the com­bined gross do­mes­tic prod­uct or GDP), way below the 2016 nadir of $190bn (16% of com­bined GDP).

Nev­er­the­less, the GCC gov­ern­ments’ net debt po­si­tions have “sig­nif­i­cantly de­te­ri­o­rated” since oil prices fell in 2015 and debt-ser­vic­ing costs now ac­count for a much larger pro­por­tion of fis­cal rev­enue, the re­port said.

Bar­ring any sig­nif­i­cant fis­cal con­sol­i­da­tion or sharp rise in oil prices, S&P does not ex­pect this sit­u­a­tion to re­verse.

“We fore­cast the GCC cen­tral gov­ern­ment bal­ances to re­main in deficit un­til at least 2021,” it said, es­ti­mat­ing pre­vi­ous fund­ing needs in 2015-17 to be $450bn (or 12% of com­bined GDP), com­pared with an ex­pected $300bn over 201821 (5% of GDP), and that to­tal fund­ing re­quire­ments over 2015-21 to be around $750bn.

Sup­port­ing the im­proved fis­cal struc­ture are the al­most tre­bling of oil prices to around $80 a bar­rel and the fis­cal con­sol­i­da­tion mea­sures such as value added tax.

“We ex­pect the av­er­age GCC fis­cal deficit will widen slightly over the fore­cast pe­riod to around 6% of GDP (from 5.5% in 2018), driv­ing the $300bn fi­nanc­ing re­quire­ment,” S&P said.

The rat­ing agency still be­lieves that re­gional gov­ern­ment con­sol­i­da­tion mea­sures will, for the most part, bear fruit over the medium-to-long term. Since 2015, gov­ern­ments have opted to avoid a sharp fis­cal cor­rec­tion ( which would have been both growth-sap­ping and po­lit­i­cally sen­si­tive).

In­stead, where avail­able, they have de­ployed sub­stan­tial stocks of as­sets to cush­ion the neg­a­tive ef­fects of the oil price shock, it said, adding growth­boost­ing cap­i­tal ex­pen­di­ture (capex) is also em­bed­ded in strate­gic eco­nomic plans and is set to re­main high.

In Doha the un­der­ly­ing man­date of the Qatar In­vest­ment Au­thor­ity, the man­ager of sov­er­eign as­sets, is to en­sure fu­ture sav­ings for the coun­try, ex­cept, as re­cently demon­strated, in ex­cep­tional cir­cum­stances. This partly in­forms its pol­icy de­ci­sion to bor­row, rather than use as­sets.

The scale of fi­nanc­ing needs also of­fers po­ten­tial up­side for re­gional sov­er­eign sukuk is­suance, par­tic­u­larly as this could of­fer some di­ver­si­fi­ca­tion to in­vestors or at­tract liq­uid­ity from in­vestors in Is­lamic prod­ucts, ac­cord­ing to S&P.

Work has been car­ried out by the GCC gov­ern­ments over the past few years to es­tab­lish the nec­es­sary le­gal frame­works for sukuk is­suance in do­mes­tic and ex­ter­nal mar­kets, it said, adding the com­plex­ity and slow speed to mar­ket of Is­lamic prod­ucts how­ever con­tinue to in­hibit the in­dus­try’s wide­spread growth.

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