Gulf Arab Nations to Borrow at Record Rates as Economies Weaken

(Bloomberg) --

Gulf Arab economies will borrow a record amount this year to help cover budget deficits expected to add up to about $490 billion over the next three years, according to S&P Global Ratings.

For the five oil-reliant members of the Gulf Cooperation Council, the dual shock of the coronavirus pandemic and lower crude prices means sovereign balance sheets may “continue to deteriorate up until 2023,” analysts including Trevor Cullinan said in a report Monday. Debt will probably be used to finance about 60% of the central government fiscal shortfalls in 2020-2023, with asset drawdowns used to cover the rest.

S&P predicts GCC nations -- Saudi Arabia, the United Arab Emirates, Kuwait, Qatar, Bahrain and Oman -- will borrow about $100 billion and use up another $80 billion in government assets to cover this year’s financing requirement. Annual debt issuance will reach $70 billion by 2023 under the assumption that Saudi Arabia narrows its fiscal shortfall over the period.

“Most GCC sovereigns have demonstrated ready access to the international capital markets this year, and are in the enviable position of having substantial pools of external liquid assets to fund their fiscal deficits should market access become constrained,” S&P said.

All but debt-free before crude prices nosedived in 2014, many Gulf governments have increasingly come to count on borrowing while making only halting efforts to cut spending and diversify their economies. Saudi Arabia has largely relied on debt to cover its deficit this year, and countries from Bahrain to Qatar have also tapped the bond market.

S&P said Oman will likely follow in its neighbors’ footsteps and borrow in the second half of the year as global economic conditions improve and oil prices recover. In the absence of debt issuance, the Omani government would likely liquidate some of its financial assets, which S&P estimates at about 55% of gross domestic product in 2019.

The rating company forecasts an average Brent oil price of $30 per barrel for the rest of 2020, $50 in 2021, and $55 from 2022.

Other highlights from the report:

• The simple average of combined deficits in the region will reach 18% of GDP this year, compared with 5% in 2019 and 16% in 2016 after oil crashed; shortfalls should start shrinking in 2021.
• Bahrain, Oman, Qatar and Saudi Arabia seen financing most of their deficits through debt, while the UAE capital, Abu Dhabi, and Kuwait are expected to rely more on their assets.
• Government assets in Kuwait, Abu Dhabi, Qatar, and Saudi Arabia exceed government debt by a relatively wide margin; in the case of Bahrain and Oman, their debt exceeds assets.

©2020 Bloomberg L.P.