GCC countries’ financing needs are expected to be at $151.3bn this year, which will be met by reserves, bonds and other loans, Kuwait Financial Centre (Markaz) has said.
Of this, $78.1bn is expected to come from reserves (52%), $57.7bn from domestic and international bond issuances (38%) and the rest through loans (10%), said MR Raghu, head (Research) at Markaz.
Overall, GCC governments are expected to raise between $285bn and $390bn cumulatively through 2020 through local and international bonds, said Raghu, also the managing director of Marmore Mena Intelligence, a Markaz research subsidiary.
Raghu said low oil prices have altered the fiscal landscape of GCC countries as the prized fiscal surplus registered over the years has flipped into large scale deficits to the tune of $160bn in 2015 and 2016 respectively.
In 2015, the deficit was partly met by domestic bond issuances and the remaining by liquidating reserves held in sovereign wealth funds (SWFs). Saudi Arabia for the first time in eight years issued local debt to raise about $26bn from domestic banks and utilised almost $100bn of its reserves.
Raghu outlined that the impact of lower oil revenues has visibly impacted the Kuwaiti banks’ deposit mobilisation process, as government deposits account for sizeable portion.
Fall in deposits growth, coupled with governments drawing down on their savings and placement of domestic bonds by the governments with the local banks, has usurped liquidity in the regional financial system causing interbank rates to rise. Though the banks are well capitalised, they may not be able to act as the sole source of funding avenue for the governments.
Rising debt levels for the GCC governments and uncertain outlook regarding oil prices, which determines the debt servicing capabilities, have led to higher cost of insurance for insuring government debt as evidenced by the widening spreads for credit default swaps (CDS), he said.
While the UAE, Kuwait Saudi Arabia and Qatar boast of robust fiscal reserves, Bahrain and Oman have minimal reserves by comparison, he said.
The sovereign ratings of Bahrain, Oman and Saudi Arabia have been downgraded in the recent weeks. Further, lack of clarity regarding debt management policies of few GCC countries has caused wide spread speculation regarding the way the deficit could be financed.
This uncertainty has resulted in fixed income investors demanding wider spreads for outstanding issues in the GCC region.
To forecast the sovereign debt issuance Markaz has assumed assumptions regarding the way the deficit would be financed either by drawing down on the reserves or through raising debt. While Qatar and Oman have clearly provided indications regarding their approach to plug the deficit, Saudi Arabia and Bahrain budgetary documents fall short of such discussion.
Apart from forecasting debt issuance through budgetary estimates, debt issuance until 2020 is estimated through IMF projections of fiscal deficit. Due to lack of clarity on the debt levels that would be taken up by the GCC government, based on historical data and its own analysis, Markaz expects 40% to 60% of deficits in the years 2017 to 2020 to be financed by new debt issuance.
Based on Markaz analysis, the new debt issuances by the GCC government could usher in a new era for GCC fixed income markets. The challenging environment posed by lower oil prices should be converted into an opportunity to develop the domestic debt markets.
In this regard, establishment of debt management office and regulatory framework to clearly communicate to the markets are necessary. Though domestic debt issuance allows for easier and faster way to raise capital at lower credit spreads, it could usurp liquidity and ‘crowd out’ borrowing space for private borrowers.
On the other hand, “jumbo issuances” are possible in international issuances, while it increases the vulnerability due to increased exposure to foreign debt.
That said, Markaz feels that the GCC fixed income offers “higher risk-return attributes” than the developing and emerging markets. Lower correlation with other asset classes including equities argues favourably for their inclusion in an investor portfolio.
“The fact that all the currencies are pegged provides comfort to the investor as it helps avoid currency risk. However, geopolitical risks and uncertainty regarding oil price could affect the bond performance,” Markaz said.
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