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Abu Dhabi, UAEFriday 14 December 2018

Arabian Gulf states to tap debt markets, drawdown funds to the tune of $160bn in 2018, Fitch says

Inability to cope with low oil prices and geopolitical tension exacerbating fiscal deficits

The IMF had called last year on the kingdom to ease the pace of fiscal consolidation Ali Jarekji / Reuters
The IMF had called last year on the kingdom to ease the pace of fiscal consolidation Ali Jarekji / Reuters

Arabian Gulf countries will tap debt markets and drawdown funds to the tune of US$160 billion in 2018 because of fiscal deficits caused by low oil prices, Fitch Ratings said on Thursday.

The rating agency is projecting $110bn in foreign and domestic debt issuances and around $50bn in drawdowns from sovereign wealth funds and external reserves.

"Budget deficits will persist across the GCC and will stay in double digits in Bahrain and Oman, despite the oil price recovery,” said Fitch. “For the majority of sovereigns, fiscal break-even oil prices are still considerably above current or expected actual oil price levels. This is resulting in worsening sovereign debt and external asset ratios.”

Fitch has maintained a negative outlook for Middle East and North Africa sovereigns because some oil exporters are unable to cope with the low oil price environment amid an increase in geopolitical tensions. Three of its 13 MENA rated sovereigns have negative outlooks and the rest have stable outlooks.

The energy-exporting Gulf region has been posting fiscal deficits since oil prices started to plunge in 2014. Gulf states have actively tapped the bond market, with Saudi Arabia issuing last year a $17.5bn conventional bond, the biggest ever for an emerging market nation.

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Moody’s expects GCC sovereign debt issuance to fall 16.5% this year

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GCC international sovereign debt issuance is forecast to decline by 16.5 per cent this year from last year’s record sales as fiscal deficits narrow, but higher interest rates in the US and oil price gyrations could affect the outlook, Moody’s Investors Service said in March.

Sovereign debt issuance is projected to decline to $32.5bn this year from $38.9bn last year because aggregate fiscal deficit will narrow to 6.4 per cent of GDP from 8.9 per cent of GDP, Moody’s said.

Fitch said subsidy reforms have slowed in the Arabian Gulf, further exacerbating the fiscal imbalance.

Only UAE and Saudi Arabia have introduced excise taxes and they are the only two GCC states that have committed to introducing a five per cent value-added tax on January 1.

“Implementation of taxation, privatisation and broader public-sector reform is taking time, even as the potential for spending cuts is being exhausted,” said Fitch.