This report does not constitute a rating action.
S&P Global Ratings expects the aggregate Gulf Cooperation Council (GCC) general government balance to improve due to higher oil prices, fiscal consolidation, and robust nonhydrocarbon activity. We project an about $11 billion deficit on average over 2023-2026 (0.5% of average GCC GDP over this period) from an average of $24 billion in 2019-2022 (1.3%). Higher oil prices and relative fiscal discipline have led Dubai (unrated), Oman (BB+/Stable/B), and Qatar (AA/Stable/A-1+) to repay some of their government debt. In turn, the aggregate GCC stock of net government debt should modestly improve having weakened after oil prices fell sharply in 2015. We also note some GCC sovereigns have substantial external liquid assets available to meet their funding needs and support their economies in the face of external shocks.
In this Credit FAQ, S&P Global Ratings addresses frequently asked questions from investors on the expected fiscal performance of GCC governments in the coming years.
Frequently Asked Questions
How does S&P Global Ratings see the GCC's aggregate fiscal balance developing?
We estimate a cumulative general government deficit of about $37 billion (about 2% of GCC GDP) in 2023, down from an aggregate surplus of $104 billion in 2022. This results from our expectation that the Brent oil price will fall to average $85 per barrel (/bbl) during 2023-2026, from about $100/bbl in 2022 (see "S&P Global Ratings Has Raised Its Henry Hub Natural Gas Price Assumptions For 2024 And 2025," published Nov. 7, 2023, on RatingsDirect). We also incorporate ongoing OPEC+-related constraints on oil production in all GCC countries except Qatar to year-end 2024. Beyond these factors, we expect Saudi Arabia to post a relatively large nominal fiscal deficit this year due to higher government spending, partly on capital expenditure (capex), which will support economic activity.
Following a large cumulative deficit in 2023, we expect a decline to $6 billion in total in 2024-2026. This is because the combined deficit of $102 billion we expect for Saudi Arabia (unsolicited A/Stable/A-1), Kuwait (A+/Stable/A-1), and Bahrain (B+/Positive/B) will be largely offset by surpluses from other GCC members (see chart 1).
In our view, nominal expenditure levels in 2023 will be broadly in line with (or in the case of Oman, below) pre-pandemic levels for GCC governments, except for Kuwait and Saudi Arabia. This suggests significant spending restraint by most governments, notwithstanding the recent external shocks of the COVID-19 pandemic and sharp drop in oil prices in 2020. Most countries are also diversifying their government revenue streams away from hydrocarbons. Value added tax (VAT) was introduced in Saudi Arabia and the United Arab Emirates (UAE) in 2018, Bahrain in 2019, and Oman in 2021. Saudi Arabia increased the VAT rate to 15% in 2020 from 5% while Bahrain doubled it to 10% in 2022. Separately, the UAE has introduced a broad-based corporate income tax, which became effective from June 2023. In this report, we consolidated data on the UAE federal government and the emirates of Abu Dhabi (AA/Stable/A-1+), Dubai, Ras Al Khaimah (A-/Positive/A-2), and Sharjah (BBB-/Stable/A-3) for the UAE.
Why are Bahrain, Kuwait, and Saudi Arabia running fiscal deficits when oil prices are high?
All three have relatively high fiscal breakeven oil prices compared with their GCC peers, meaning that they require either higher oil prices or export volumes, expansion of other nonoil revenues sources, or sharper cuts in expenditure to achieve fiscal balance (see chart 2). Given our Brent oil price assumptions, the breakeven oil prices shown in the chart below suggest only Bahrain should post a fiscal deficit throughout the forecast to 2026. However, we also expect Saudi Arabia and Kuwait to post deficits over this period.
Saudi Arabia's 2024 prebudget statement indicates fiscal deficits through 2025 as it increases medium-term expenditure to support development projects under the Vision 2030 program. In line with the government's revised spending plans, we expect fiscal deficits of about 3% of GDP in 2023 followed by an average 1% deficit during 2024-2026.
Similarly, we expect Kuwait to report fiscal deficits averaging 14% of GDP in 2023-2026 on account of high expenditure, notwithstanding relatively high oil prices. The reason for the deficits is that our forecasts do not include our estimates of Kuwait Investment Authority (KIA) investment income and include the government's discretionary 10% revenue transfer to the Future Generations Fund (FGF; see note in chart 2). In addition, Kuwait's 2023-2024 budget plans a sizable increase in expenditure, including a policy to create new public sector jobs, permit government employees to convert vacation day balances into cash payments, and paying arrears to the Ministry of Oil and Ministry of Electricity. That said, Kuwait's general government fiscal position remains very strong on account of KIA assets, and the government's low debt burden of about 5% of GDP in 2022.
The Bahraini government is targeting close to fiscal balance by 2024. We do not currently expect the target to be met on account of lower-than-projected non-oil receipts and higher overall expenditure, the latter partially owing to delays in the rationalization of social subsidies. However, deficits could be lower than under our base case should the government fully commit to consolidation measures. We also note that Bahrain's fiscal breakeven oil price remains high but has fallen compared to 2020 due to the post-pandemic increase in revenue aided by the government's non-oil revenue diversification efforts.
The 12% reduction in Bahrain's fiscal breakeven price is similar to that of Kuwait, while the 32% lower fiscal breakeven in Oman indicates the very strong fiscal consolidation that has supported our three upgrades--to 'BB+' from 'B+'--since 2020 (see "Sovereign Ratings History," published Oct. 13, 2023).
Are oil prices the key determinant of GCC sovereign ratings?
Higher oil prices are supportive of our ratings on GCC sovereigns but are not the only factor we consider (see "Criteria | Governments | Sovereigns: Sovereign Rating Methodology," originally published on Dec. 18, 2017, and republished Feb. 23, 2022). Indeed, higher oil prices have often been a disincentive for GCC governments to follow through on their 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.
What are the recent developments in GCC governments' debt strategies?
Prudent fiscal policy and the relatively higher oil price environment have resulted in some governments repaying part of their debt stock when it comes due. Dubai has been repaying its debt, including $1.9 billion in bonds from 2020 to 2022, and reduced its loans from bank Emirates NBD by 33% over the same period. This year, we expect a further decline in debt by about UAE dirham (AED) 30 billion ($8 billion), in line with the Dubai government's recent announcement regarding debt reduction, including the partial settlement of financing extended by the Abu Dhabi government and Central Bank of the UAE. As a result, we expect Dubai's gross general government debt will decline to 46% of GDP by year-end 2023 from 79% of GDP in 2020. The Qatari government intends to reduce its overall debt-to-GDP ratio by repaying maturing external debt. We expect the government's strategy to reduce total general government debt to 31% of GDP by 2026, from about 46% in 2022 (see "Qatar," published Nov. 6, 2023). For Oman, we forecast a reduction in gross government debt to 32% of GDP in 2026, from 38% of GDP in 2023, on account of continued deleveraging by the government and increasing nominal GDP (see "Oman Upgraded To 'BB+' From 'BB' On Firmer Macroeconomic Fundamentals; Outlook Stable," published Sept. 29, 2023).
Notwithstanding our expectation of reduced GCC funding requirements, we expect the region's gross debt to moderately rise in nominal terms, largely due to increased issuance in Saudi Arabia and Kuwait (see chart 3). Over the next two years, we expect the authorities to adopt measures to diversify Kuwait's sources of financing, such as a new debt law, either via parliamentary vote, or possibly via an emiri decree (see "Kuwait," published June 12, 2023). For the GCC as a whole, borrowing will be somewhat mitigated by deleveraging in Oman, but even more so in Qatar. Saudi Arabia accounts for about 45% of total GCC debt in 2023, followed by the UAE (22%), Qatar (16%), Bahrain (9%), Oman (7%), and Kuwait (1%).
Why do GCC governments with sizeable liquid assets issue debt at all?
Notwithstanding most GCC states' sizable liquid assets, they have regularly issued in the market. This is because prior to the sharp rise in interest rates, they believed that the return on their assets would be greater than the long-term cost of raising debt. In turn, they prefer not to liquidate their assets, especially if stock markets are falling. 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 FGF in Kuwait. Some government's also issued debt to establish benchmark yield curves in foreign and, more recently, local currency debt.
However, we note certain governments are repaying their debt and achieving this partly by liquidating assets. Dubai is actively monetizing its assets with plans to list 10 government-owned companies announced last year. Some were listed in 2022, generating estimated cash proceeds of about AED30 billion ($8 billion). With six more companies still to be listed, the government should see another liquidity boost, which could support further debt reduction.
Our estimates of liquid assets strengthen governments' fiscal positions, supporting the creditworthiness of GCC sovereigns. Among the GCC states we rate, Kuwait, Abu Dhabi, Qatar, and Saudi Arabia maintain very strong, or in some cases extremely strong, net asset positions by prudently saving their hydrocarbon wealth (see chart 4). Over 2023-2026, we expect government debt to exceed our estimate of liquid assets for Bahrain and Sharjah.
- S&P Global Ratings Has Raised Its Henry Hub Natural Gas Price Assumptions For 2024 And 2025, Nov. 7, 2023
- Sovereign Ratings Score Snapshot, Nov. 7, 2023
- Qatar, Nov. 6, 2023
- Credit Conditions: War In The Middle East Compounds Global Geopolitical Risks, Oct. 18, 2023
- Global Sovereign Rating Trends: Third-Quarter 2023, Oct. 16, 2023
- Sovereign Ratings List, Oct. 13, 2023
- Sovereign Ratings History, Oct. 13, 2023
- Sovereign Risk Indicators, Oct. 9, 2023. Interactive version available at http://www.spratings.com/sri
- Oman Upgraded To 'BB+' From 'BB' On Firmer Macroeconomic Fundamentals; Outlook Stable, Sept. 29, 2023
- Economic Research: Greater Share Of Working Women Bolster Saudi Arabia's Economic Growth, Improving Productivity Will Entrench It, Sept. 20, 2023
- Saudi Arabia ‘A/A-1’ Ratings Affirmed; Outlook Stable, Sept. 16, 2023
- Banks In Major GCC Economies Remain Resilient To Less Supportive Operating Conditions, Sept. 12, 2023
- The Global Sukuk Market Is Showing Pockets Of Opportunity, July 12, 2023
- Kuwait, June 12, 2023
- Bahrain 'B+/B' Ratings Affirmed; Outlook Remains Positive, May 26, 2023
- Dubai’s Debt Reduction Strengthens Government Balance Sheet, May 22, 2023
- 2022 Annual Global Sovereign Default And Rating Transition Study, April 28, 2023
- Sovereign Debt 2023: Emerging EMEA Cautiously Returns To The Markets, March 9, 2023
- Energy Transition: Competitive Advantages Shield GCC Sovereigns, March 8, 2023
- Gulf Nations Invest To Accelerate Deployment Of Renewable Energy, Feb. 27, 2023
|Primary Credit Analyst:||Juili Pargaonkar, Dubai +971-4-372-7167;|
|Secondary Contact:||Trevor Cullinan, Dubai + (971)43727113;|
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