This report does not constitute a rating action.
- We expect the aggregate Gulf Cooperation Council (GCC) central government deficit to fall sharply to about $80 billion in 2021 (5% of GDP) from $143 billion in 2020 (10% of GDP).
- Lower deficits will be supported by higher oil prices, fiscal consolidation measures, and a higher level of economic activity as COVID-19 restrictions are lifted.
- Nevertheless, still-high GCC central government deficits will result in continued balance sheet deterioration in most cases.
- That said, GCC sovereigns have demonstrated ready access to international capital markets and many have substantial pools of external liquid assets available to fund their fiscal deficits and support their economies in the face of external shocks.
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 central government deficits will reach about $355 billion cumulatively between 2021 and 2024 (see chart 1). About 60% of this relates to Saudi Arabia (A-/Stable/A-2), the GCC's largest economy, followed by Kuwait (AA-/Negative/A-1+) with 25%, the United Arab Emirates (UAE) with 7%, and Oman (B+/Stable/B) with 4%.
Chart 1 shows that the aggregate GCC central government deficit did not deteriorate by as much in 2020 as it did in 2016. This is despite a slightly lower average Brent oil price of $42 per barrel (/bbl) in 2020, compared with $44/bbl in 2016, and the GCC economies being hit by the additional shock of the COVID-19 pandemic. The data indicates that while Kuwait's fiscal deficit was much larger in 2020 and Bahrain's (B+/Stable/B) deficit was broadly in-line with the 2016 outturn, other GCC countries experienced stronger budgetary performance.
Many GCC states have shown spending restraint in response to the double external shocks of 2020, given their already-large fiscal deficits going into the year. Some have also made inroads to diversifying their government revenue streams away from hydrocarbons. Value added tax (VAT) was introduced in Saudi Arabia and the UAE in 2018, in Bahrain in 2019, and Oman in 2021. The stronger regional outturn in 2020 compared with 2016 was significantly driven by Saudi Arabia, where the VAT rate increased to 15% from 5% to shore-up government revenue.
We expect that Kuwait will register the highest central government deficit-to-GDP ratio of 20% in 2021, followed by Bahrain and the UAE at 6%, Saudi Arabia at 5%, Oman at 4%, and Qatar (AA-/Stable/A-1+) at 1% (see chart 2). In this report we focus on the central government balance, since this is usually the largest part of governments' funding requirements. We exclude estimates of government debt refinancing and income related to sovereign wealth funds, since including the latter would cloud the picture of governments' funding needs.
We expect fiscal deficits will reduce over 2021-2022 and widen again in 2023-2024 given our oil price assumptions, as well as the gradual tapering of oil production cuts in line with the May 2021 OPEC+ agreement. In our forecasts, we assume an average Brent oil price of $60/bbl for the remainder of 2021, $60/bbl in 2022, and $55/bbl in 2023 and beyond (see "S&P Global Ratings Revises Oil And AECO Natural Gas Price Assumptions And Introduces Dutch Title Transfer Facility Assumption," published March 8, 2021 on RatingsDirect).
How will our GCC ratings be affected by current higher oil prices?
Higher oil prices are supportive of our GCC government ratings but are by no means the only factor we consider (see "Criteria: Sovereign Rating Methodology," originally published on Dec. 18, 2017, and republished Feb. 5, 2021). Indeed, higher oil prices derailed GCC governments' fiscal consolidation plans in the past, leading to increased spending and/or delays in planned fiscal reforms. The path to significantly narrowing GCC fiscal deficits remains contingent upon the direction of government policy responses as much as it does on oil prices.
Given the significant balance sheet deterioration since oil prices sharply fell, beginning second-half 2014, even if prices return to much higher levels we would not necessarily expect our ratings on hydrocarbon-exporting sovereigns to return to pre-2015 levels, absent changes in other rating factors (see "For Hydrocarbon-Exporting Sovereigns, Higher Oil Prices Will Not Immediately Reverse Longer-Term Balance Sheet Deterioration," published March 17, 2021.
How much debt has been issued by GCC governments?
Since the structural decline in oil prices, many GCC sovereigns have posted sizable central government deficits (see chart 3). These increased funding needs prompted total GCC government debt issuance in local and foreign currency of $90 billion in 2016 and close to $100 billion in 2017. GCC government debt increased by much less in 2020 ($70 billion), due to fiscal constraints and more diversified government revenue sources. Looking ahead, we expect total annual debt issuance to average about $50 billion over 2021-2024, with higher borrowing in the outer years, when we assume lower oil prices.
GCC governments have borrowed, for the most part, rather than liquidated their assets to fund their deficits. We assume that the $355 billion of financing required over 2021-2024 will be roughly split 50:50 between debt issuance and asset drawdowns. We base this projection 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, and Saudi Arabia will finance most of their deficits through debt, while Abu Dhabi (AA/Stable/A-1+), Kuwait, and Qatar will draw more on their assets.
Will the potential passing of the debt law ease Kuwait's fiscal challenges?
We assume that Kuwait will pass a debt law in 2021. However, the scale of the fiscal deficit we project through to 2024 implies that the borrowing authorization under the law (previously proposed at Kuwaiti dinar 20 billion) could be exhausted in about three years. As such, current problems will likely resurface. A longer term sustainable solution could comprise a more comprehensive program of reforms and fiscal adjustment, including cutting subsidies, closing spending loopholes, and introducing new taxes, like several other GCC states. However, such reforms remain difficult to achieve in Kuwait due to the confrontational relationship between parliament and the government (see "Kuwait 'AA-' Ratings Affirmed; Outlook Remains Negative," published Jan. 16, 2021).
Why do GCC governments with sizeable liquid assets issue debt at all?
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, Saudi Arabia, and Ras Al Khaimah (A-/Stable/A-2) exceed government debt, in some cases by a wide margin (see chart 4). For Bahrain, Oman, and Sharjah (BBB-/Stable/A-3), their debt exceeds their assets.
We expect most GCC government balance sheets will continue to deteriorate until 2024, since some fiscal deficits remain quite large.
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 debt. In turn, they prefer not to liquidate their assets, especially if stock markets are falling and accommodative global monetary policy has reduced the cost of raising funds. In other cases, governments may also be reluctant to liquidate pools of assets that they have earmarked for use by future generations, as seen with the Futures Generation Fund in Kuwait.
- Sovereign Rating Methodology, Dec. 18, 2017
- For Hydrocarbon-Exporting Sovereigns, Higher Oil Prices Will Not Immediately Reverse Longer-Term Balance Sheet Deterioration, March 17, 2021
- S&P Global Ratings Revises Oil And AECO Natural Gas Price Assumptions And Introduces Dutch Title Transfer Facility Assumption, March 8, 2021
- Sovereign Debt 2021: EMEA Emerging Markets Borrowing To Remain Elevated Versus Pre-Pandemic Levels, March 1, 2021
- Expat Exodus Adds To Gulf Region's Economic Diversification Challenges, Feb. 15, 2021
- Kuwait 'AA-' Ratings Affirmed; Outlook Remains Negative, Jan. 15, 2021
- Institutional Changes In Oman Will Improve The Succession Process And Support Reform Momentum, Jan. 15, 2021
- Resolution Of The Qatar Dispute To Improve Political And Economic Cooperation In The GCC Region, Jan. 7, 2021
- GCC Economic Activity Held Back By Its Hydrocarbon-Heavy Economic Structure And OPEC-Related Production Cuts, Dec. 7, 2020
- Emirate of Ras Al Khaimah Downgraded To 'A-' On Increased Macroeconomic Risks; Outlook Stable, Oct. 23, 2020
- The Most Pressing Near-Term Economic Challenge For Kuwait's New Emir Is Resolving The Funding Gap, Oct. 5, 2020
- Israel's Agreements With Bahrain And The UAE Signal Shifting Alliances In The Middle East, Sept. 17, 2020
|Primary Credit Analyst:||Trevor Cullinan, Dubai + (971)43727113;|
|Secondary Contacts:||Giulia Filocca, London 44-20-7176-0614;|
|Ravi Bhatia, London + 44 20 7176 7113;|
|Zahabia S Gupta, Dubai (971) 4-372-7154;|
|Max M McGraw, Dubai + 97143727168;|
|Dhruv Roy, Dubai + 971(0)56 413 3480;|
|Maxim Rybnikov, London + 44 7824 478 225;|
|Shokhrukh Temurov, CFA, Dubai + 97143727167;|
|Additional Contact:||EMEA Sovereign and IPF;|
No content (including ratings, credit-related analyses and data, valuations, model, software or other application or output therefrom) or any part thereof (Content) may be modified, reverse engineered, reproduced or distributed in any form by any means, or stored in a database or retrieval system, without the prior written permission of Standard & Poor’s Financial Services LLC or its affiliates (collectively, S&P). The Content shall not be used for any unlawful or unauthorized purposes. S&P and any third-party providers, as well as their directors, officers, shareholders, employees or agents (collectively S&P Parties) do not guarantee the accuracy, completeness, timeliness or availability of the Content. S&P Parties are not responsible for any errors or omissions (negligent or otherwise), regardless of the cause, for the results obtained from the use of the Content, or for the security or maintenance of any data input by the user. The Content is provided on an “as is” basis. S&P PARTIES DISCLAIM ANY AND ALL EXPRESS OR IMPLIED WARRANTIES, INCLUDING, BUT NOT LIMITED TO, ANY WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE, FREEDOM FROM BUGS, SOFTWARE ERRORS OR DEFECTS, THAT THE CONTENT’S FUNCTIONING WILL BE UNINTERRUPTED OR THAT THE CONTENT WILL OPERATE WITH ANY SOFTWARE OR HARDWARE CONFIGURATION. In no event shall S&P Parties be liable to any party for any direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential damages, costs, expenses, legal fees, or losses (including, without limitation, lost income or lost profits and opportunity costs or losses caused by negligence) in connection with any use of the Content even if advised of the possibility of such damages.
Credit-related and other analyses, including ratings, and statements in the Content are statements of opinion as of the date they are expressed and not statements of fact. S&P’s opinions, analyses and rating acknowledgment decisions (described below) are not recommendations to purchase, hold, or sell any securities or to make any investment decisions, and do not address the suitability of any security. S&P assumes no obligation to update the Content following publication in any form or format. The Content should not be relied on and is not a substitute for the skill, judgment and experience of the user, its management, employees, advisors and/or clients when making investment and other business decisions. S&P does not act as a fiduciary or an investment advisor except where registered as such. While S&P has obtained information from sources it believes to be reliable, S&P does not perform an audit and undertakes no duty of due diligence or independent verification of any information it receives. Rating-related publications may be published for a variety of reasons that are not necessarily dependent on action by rating committees, including, but not limited to, the publication of a periodic update on a credit rating and related analyses.
To the extent that regulatory authorities allow a rating agency to acknowledge in one jurisdiction a rating issued in another jurisdiction for certain regulatory purposes, S&P reserves the right to assign, withdraw or suspend such acknowledgment at any time and in its sole discretion. S&P Parties disclaim any duty whatsoever arising out of the assignment, withdrawal or suspension of an acknowledgment as well as any liability for any damage alleged to have been suffered on account thereof.
S&P keeps certain activities of its business units separate from each other in order to preserve the independence and objectivity of their respective activities. As a result, certain business units of S&P may have information that is not available to other S&P business units. S&P has established policies and procedures to maintain the confidentiality of certain non-public information received in connection with each analytical process.
S&P may receive compensation for its ratings and certain analyses, normally from issuers or underwriters of securities or from obligors. S&P reserves the right to disseminate its opinions and analyses. S&P's public ratings and analyses are made available on its Web sites, www.standardandpoors.com (free of charge), and www.ratingsdirect.com and www.globalcreditportal.com (subscription), and may be distributed through other means, including via S&P publications and third-party redistributors. Additional information about our ratings fees is available at www.standardandpoors.com/usratingsfees.
Any Passwords/user IDs issued by S&P to users are single user-dedicated and may ONLY be used by the individual to whom they have been assigned. No sharing of passwords/user IDs and no simultaneous access via the same password/user ID is permitted. To reprint, translate, or use the data or information other than as provided herein, contact S&P Global Ratings, Client Services, 55 Water Street, New York, NY 10041; (1) 212-438-7280 or by e-mail to: email@example.com.