Ratings agency says non-bank government-related entity debt is as high as 32% of GDP in Oman
Government-related entity (GRE) debt is a significant and growing contingent liability for some governments of the Gulf Cooperation Council (GCC), according to new research by Fitch Ratings.
Fitch estimates that non-bank GRE debt in 2018 ranged from 12 percent of GDP in Kuwait to 32 percent of GDP in Oman.
Debt of government-related banks - wholesale or interbank funding, excluding customer deposits - ranged from 9 percent of GDP in Bahrain to 39 percent of GDP in Qatar in 2018, the ratings agency said.
It added that the potential scope of contingent liabilities from the banking sector is even larger, with sector total assets ranging from 74 percent of GDP in Saudi Arabia to 209 percent of GDP in Bahrain.
Fitch noted that the high public sector debt reflects heavy state involvement in the economy and the use of GREs as a key tool of economic policy.
"Non-bank GRE debt has been increasing in countries whose governments are themselves facing fiscal pressures that limit the ability of governments to make direct capital contributions to the GREs, prompting the latter to finance themselves through borrowing instead," Fitch said.
"In our view, increased GRE borrowing could also reflect quasi-fiscal spending by some GREs. In 2015-2018, non-bank GRE debt expanded by 15 percent of GDP in Bahrain and 8 percent of GDP in Oman and Saudi Arabia.
"All GCC states have a record of supporting their GREs, either on an ongoing basis or in periods of distress. The likelihood of future assistance is high given past experience, the continuing importance of GREs to national economic growth strategies and, frequently, their status as national champions," the agency added.
Large sovereign net foreign assets and low net debt limit the credit impact of large or growing contingent liabilities, notably for Abu Dhabi and Kuwait, the research said, adding that the GREs have assets as well as liabilities.
The high standalone credit quality of some GREs, in particular most of the national oil companies in the region, is also a mitigating factor.
"Nevertheless, many GCC sovereigns rely on exceptional balance-sheet strengths to outweigh structural weaknesses, including undiversified economies and political risk. A large build-up of GRE debt or crystallisation of GRE debt into government debt could undermine the magnitude of these strengths, potentially leading to a negative rating action," Fitch concluded.