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