With oil and gas prices expected to remain low, the Gulf Cooperation Council’s (GCC) fiscal deficit, excluding investment income, is slated to remain large at $140bn this year and $120bn in 2018, according to the Institute of International Finance (IIF), a US-based economic think-tank.
Projecting a cumulative 100 basis points rate hike by the US Federal Reserve by end of 2018, it expects the funding costs to rise in the GCC, where external commercial borrowings are slated to be $40bn this year and $30bn in 2018.
“Despite the sizeable fiscal adjustment by the GCC countries since 2015, we are projecting the region’s fiscal deficit, excluding investment income, to remain large at 9.5% of GDP (gross domestic product) in 2017 and expect the deficit to narrow only gradually to 7.7% in 2018,” the IIF said.
While two-thirds of this ($140bn fiscal deficit in 2017) is attributable to Saudi Arabia, deficits remain large as a proportion of GDP in Bahrain and Oman,” it said, adding Kuwait, Qatar, and the UAE are also facing fiscal shortfalls, but these are offset by significant investment income.
The GCC countries are financing the deficits through a combination of external and domestic borrowing, as well as by tapping their foreign assets, it said.
Estimating that the GCC sovereigns have borrowed $85bn externally since early 2015 with $54bn raised in 2016 and $28bn in the first half of this year, the IIF said most countries have come to markets early in 2017 to get ahead of higher funding costs due to the US rate hikes, but ongoing financing needs would mean a steady supply of new sovereign issuance.
Saudi Arabia raised $9bn in April and may raise a further $6bn in the second half, it said, adding with the rate of return on its investments higher than the cost of borrowing, Kuwait raised $8bn in the first quarter and is expected to issue again next year.
After frontloading its borrowing with $7bn in bonds and sukuk and reports of a $3.6bn syndicated loan from Chinese banks, Oman is also not expected to issue before next year.
Only the UAE and Qatari governments have not tapped external markets this year. While Abu Dhabi officials went on a non-deal roadshow early in the year, this has not been followed by a bond issue, according to the IIF.
With a smaller deficit, due to higher oil prices, the IIF believes that Abu Dhabi has decided to solely draw down on Abu Dhabi Investment Authority’s foreign assets.
Although Qatar has also not directly tapped external markets, the government has been borrowing domestically and this is, in effect, being funded from external sources by the banking system, it said.