Debt concerns

Rising public debt and the debt-servicing burden could become a concern for some of the GCC economies in the context of rising interest rates and higher bond yields. Although public debt remains manageable for most GCC countries, the rapid build-up of debt in some of them is a cause for concern, according to the International Monetary Fund (IMF).

Debt has increased by an average of 10 percentage points of GDP each year since 2013, with countries financing large fiscal deficits through a combination of drawdowns of buffers and increased domestic and foreign borrowing. “The fiscal impact of [rising] debts could be larger if along with the rising interest rates, these countries also experience a sudden stop in international market access that leads to a materialisation of fiscal contingent liabilities,” the IMF said in a report.

Elevated US Treasury yields and a stronger US dollar sparked a sell-off across several emerging economies and pushed yields higher over the past few months. The modest GCC bond outflows in March and April are likely to be temporary as GCC bonds offer solid riskadjusted returns and foreign investors’ exposure is limited.

“Bond prices in the GCC fell in May, in line with the ongoing sell off in Emerging Market assets,” Iradian said. “However, the sovereign spreads remain lower than most emerging markets as government financing needs have eased with higher oil prices. Pressures on GCC currencies in the forward market have eased, unlike several Emerging Market currencies. These reflect higher oil prices and stronger fundamentals in the GCC, including low debt and large financial buffers [in the form of official reserves and sovereign wealth funds]. In this setting, we see no significant pressure on the peg against the dollar.”