Government funding needs in the Gulf Cooperation Council (GCC) have increased significantly in 2020, as low oil prices and the economic repercussions of the COVID-19 pandemic have significantly widened governments' fiscal deficits. We expect total GCC government debt to increase by a record-high of about $100 billion in 2020 alone, with an additional $80 billion run-down in government assets to finance an aggregate GCC central government deficit of about $180 billion. Based on our macroeconomic assumptions, we expect to see GCC government balance sheets continue to deteriorate up until 2023.
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.
Here, S&P Global Ratings addresses frequently asked questions from investors on the funding of GCC governments' fiscal deficits in the coming years.
Frequently Asked Questions
How does S&P Global Ratings see GCC governments' fiscal deficits developing?
We estimate that GCC sovereigns' central government deficits will reach about $490 billion cumulatively between 2020 and 2023 (see chart 1). About 55% of this deficit relates to Saudi Arabia, the GCC's largest economy, followed by Kuwait with 17% and Abu Dhabi with 11%. Here we focus on the central government balance, as this is usually the largest part of governments' funding requirements. We exclude estimates of government debt refinancing. We also exclude our estimate of income related to the sovereign wealth fund, as including this would obscure the picture of governments' funding needs.
A large part of the surge in GCC government funding needs relates to central government deficits in 2020, with the simple average reaching 18% of GDP compared with 5% in 2019 (see chart 1). In the wake of the sharp decline in oil prices from second-half 2014 (see chart 2), the 2016 combined deficit was at similar levels--$190 billion, or 16% of combined GDP.
We expect fiscal deficits will shrink from 2021 given our assumption that oil prices will improve and the tapering of oil production cuts in line with the April 2020 OPEC Plus agreement. In our forecasts, we assume an average Brent oil price of $30 per barrel (/bbl) for the rest of 2020, $50/bbl in 2021, and $55/bbl from 2022, relative to $64/bbl in 2019 (see "S&P Global Ratings Cuts WTI And Brent Crude Oil Price Assumptions Amid Continued Near-Term Pressure," published March 19, 2020, on RatingsDirect). However, as deficits still remain quite sizeable in some cases, GCC government balance sheets will continue to deteriorate up until 2023.
Saudi Arabia's deficit makes up the majority of the GCC fiscal deficit in nominal terms. As a percentage of GDP, however, Kuwait has the highest 2020 central government deficit-to-GDP ratio of 39%, followed by Oman (17%), Saudi Arabia (15%), Abu Dhabi (13%), Bahrain (12%) and Qatar (10%).
Do GCC governments issue much debt?
Since the sharp fall in oil prices, many GCC sovereigns have posted sizable central government deficits. These increased funding needs prompted total GCC government debt issuance in local and foreign currency of over $90 billion in 2016 and 2017, and we expect a new record high of about $100 billion in 2020. We then expect total annual debt issuance to trend down toward $70 billion by 2023, largely driven by our expectation of a narrowing of Saudi Arabia's fiscal deficits over the period.
GCC governments have, for the most part, borrowed rather than liquidated their assets to fund their deficits. We include in our projections a funding mix of asset drawdowns and debt issuance (see chart 3). We expect that debt issuance will meet about 60% of the $490 billion financing requirement in 2020-2023. We base this assumption on the financing trends of the past few years, governments' explicitly stated policy decisions, and our view of the availability of assets. We expect that Bahrain, Oman, Qatar, and Saudi Arabia will finance the vast majority of their deficits through debt, while Abu Dhabi and Kuwait will draw more on their assets.
Have GCC governments had access to international bond markets in 2020?
In first-quarter 2020, due to the spread of COVID-19, emerging markets experienced significant capital outflows and there was limited activity on international capital markets. In the second quarter, however, GCC sovereigns contributed significantly to the resurgence in emerging market sovereign issuance, with about $35 billion in eurobonds (see table 1).
In the absence of deep domestic capital markets, GCC governments issue on foreign markets to keep local financing from banks and other facilities available for the private sector at affordable rates.
|GCC Eurobond Issuance In The Year To Date|
|Sovereign||Amount (bil. $)||Issue date||Coupon (%)||Maturity date|
|Saudi Arabia (A-/Stable/A-2)|
|Saudi Arabia total||12.00|
|Abu Dhabi (AA/Stable/A-1+)|
|Abu Dhabi total||10.00|
Investment-grade Abu Dhabi, Qatar, and Saudi Arabia have issued the largest share of foreign debt in the year to date. GCC sovereigns, along with other emerging markets, have benefited from liquidity injections by the U.S. Federal Reserve and the European Central Bank, resulting in relatively low funding costs. GCC sovereigns have also taken the opportunity to issue debt with long maturities, with Abu Dhabi, Qatar, Saudi Arabia, and most recently Sharjah all issuing securities with maturities of 30 years or more.
It's not only higher-rated GCC sovereigns that are issuing eurobonds. Bahrain has also issued a 10-year bond, but with a much higher coupon than on issuances by investment-grade sovereigns. Other 'B' rated regional sovereigns have also accessed the international capital markets (see table 2).
|Other Middle Eastern Sovereign Eurobond Issuance In The Year To Date|
|Sovereign||Amount (bil. $)||Issue date||Coupon (%)||Maturity date|
We expect liquidity provision by the central banks in large developed markets to continue to support the demand for emerging market sovereign bonds.
Do you expect Oman to issue debt in the international capital market in 2020?
Yes. Our forecasts include the assumption that Oman will issue in second-half 2020 as global economic conditions gradually recover and oil prices track slowly rising demand. In our baseline scenario, we expect that the Omani government will meet its sizable funding needs largely through significant external debt issuance (see "Credit FAQ: How Oman Could Weather Tough Funding Conditions Ahead," published May 11, 2020). In the absence of debt issuance, the Omani government would likely liquidate some of its financial assets, which we estimate at about 55% of GDP in 2019.
Do you expect Kuwait to issue debt in the international capital market?
Kuwait has not raised debt in the international market since 2017, after the expiration of a law facilitating external debt issuance. Parliament has yet to pass a revised debt law authorizing the government to borrow, limiting its financing options. However, we expect the debt law to be passed and Kuwait to begin issuing again on the international capital markets in 2021 (see chart 3).
Our estimate of Kuwait's sovereign wealth fund assets is substantial, at about 450% of GDP in 2019. However, the portion of these assets readily available for budgetary needs--the so-called General Reserve Fund (GRF)--is much smaller, and the government is running it down to finance its deficits. The GRF could be fully liquidated by year-end 2020 (see "Kuwait Outlook Revised To Negative On Continued Depletion Of Fiscal Liquidity Buffer; 'AA-/A-1+' Ratings Affirmed," published July 17, 2020).
Do all GCC governments have sizable liquid assets they could use to fund fiscal deficits?
Thanks to their hydrocarbon wealth, some GCC governments have accumulated large pools of financial assets, which they can use to fund their fiscal deficits. Government assets in Kuwait, Abu Dhabi, Qatar, and Saudi Arabia exceed government debt, in some cases by a wide margin (see chart 4). For Bahrain and Oman, their debt exceeds their assets.
Regardless of the method used, financing the substantial multi-year deficits will result in GCC government balance sheets deteriorating up until 2023.
Why do GCC governments with sizeable liquid assets issue debt at all?
A government's funding mix will likely reflect its available resources and appetite for debt. Notwithstanding some GCC states' sizable liquid assets, they have regularly issued in the market. This is because they believe that the return on their assets will be greater than the cost of raising the debt. Therefore, they prefer not to liquidate their assets, especially when stock markets are falling and accommodative monetary policy across the globe has reduced the cost of raising funds.
In some cases, governments may also be reluctant to liquidate pools of assets that they have earmarked for use by future generations. We assume that, in critical situations, governments would amend laws or historical practices and liquidate assets in times of financial stress. For example, the underlying mandate of the Qatar Investment Authority--the manager of sovereign assets--is to ensure future savings for the country. However, when several Arab countries imposed a boycott on Qatar in 2017, outflows of nonresident funding from Qatari banks totaled $22 billion (14% of GDP). An injection of $43 billion (27% of GDP) by the government and its related entities--mostly the Qatar Investment Authority--more than compensated for the outflows.
- Kuwait Outlook Revised To Negative On Continued Depletion Of Fiscal Liquidity Buffer; 'AA-/A-1+' Ratings Affirmed, July 17, 2020
- Sovereign Ratings List, July 8, 2020
- Why GCC Pegged Exchange Rate Regimes Will Remain In Place, June 1, 2020
- Credit FAQ: How Oman Could Weather Tough Funding Conditions Ahead, May 11, 2020
- Credit FAQ: Various Rating Actions On Hydrocarbon-Exporting Sovereigns After Revision To Our Oil Price Assumptions, March 26, 2020
- S&P Global Ratings Cuts WTI And Brent Crude Oil Price Assumptions Amid Continued Near-Term Pressure, March 19, 2020
- Government Liquid Assets And Sovereign Ratings: Size Matters, Aug. 27, 2018
- GCC Sovereigns' Funding Needs Are About $300 Billion In 2018-2021, Nov. 6, 2018
- Sovereign Rating Methodology, Dec. 18, 2017
This report does not constitute a rating action.
|Primary Credit Analyst:||Trevor Cullinan, Dubai (971) 4-372-7113;|
|Secondary Contacts:||Ravi Bhatia, London (44) 20-7176-7113;|
|Zahabia S Gupta, Dubai (971) 4-372-7154;|
|Max M McGraw, Dubai + 97143727168;|
|Maxim Rybnikov, London (44) 20-7176 7125;|
|Shokhrukh Temurov, CFA, Dubai + 97143727167;|
|Research Contributor:||Shruti Ramakrishnan, Mumbai (91) 22-3342-1966;|
|Additional Contact:||EMEA Sovereign and IPF;|
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