By Trevor Cullinan
S&P Global Ratings believes that GCC governments will borrow a record amount of about $100bn in 2020 alone
Government funding needs in the Gulf Cooperation Council (GCC) have significantly increased in 2020, as low oil prices and the economic repercussions of the Covid-19 pandemic have significantly widened governments' fiscal deficits.
As a result, S&P Global Ratings believes that GCC governments will borrow a record amount of about $100 billion in 2020 alone. Fortunately, most GCC sovereigns have demonstrated ready access to the international capital markets so far 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 more constrained.
We estimate that GCC sovereigns' central government deficits will reach about $490bn cumulatively between 2020 and 2023 with about 55 percent of this nominal amount relating to Saudi Arabia, followed by Kuwait (17 percent) and Abu Dhabi (11 percent).
A large part of the surge in GCC government funding needs over 2020-2023 relates to central government deficits in 2020. As a percentage of GDP, we expect Kuwait to have the highest 2020 central government deficit-to-GDP ratio at close to 40 percent.
S&P Global Ratings believes that fiscal deficits will shrink from 2021 onwards given our assumption that oil prices will improve and the tapering of oil production cuts in line with the April 2020 OPEC Plus agreement. As deficits remain however, we predict GCC government balance sheets will continue to deteriorate up until 2023. By 2023, we expect total annual GCC debt issuance to trend down toward $70bn, largely driven by our assumption of a narrowing of Saudi Arabia's fiscal deficits.
For the most part, GCC governments have borrowed rather than liquidated their assets to fund their fiscal deficits. We assume that debt issuance will meet about 60 percent of the $490bn central government deficit financing need in 2020-2023. Bahrain, Oman, Qatar, and Saudi Arabia are expected to finance most of their deficits through debt, while Abu Dhabi and Kuwait will draw more on their assets.
Due to the spread of Covid-19, the first quarter of 2020 saw emerging markets experience significant capital outflows and limited international capital market activity. Whilst the second quarter saw GCC sovereigns contribute about $35bn in Eurobonds to a resurgence in emerging market sovereign issuance. Abu Dhabi, Qatar, and Saudi Arabia have issued the largest share of foreign debt in the year to date.
GCC sovereigns, and emerging markets, have benefited from liquidity injections by the US Federal Reserve and the European Central Bank, resulting in somewhat lower funding costs. GCC sovereigns have also issued debt with long maturities, with Abu Dhabi, Qatar, Saudi Arabia, and Sharjah all issuing securities with maturities of 30 years or more.
It is not only higher-rated GCC sovereigns that are issuing Eurobonds. Bahrain also issued a 10-year bond, but with a much higher coupon than on issuances by investment-grade sovereigns. We presume that Oman will issue debt in the second half of 2020, as global economic conditions gradually recover, and oil prices rise slowly.
We also expect Kuwait to begin issuing debt in 2021, once their parliament has passed a revised debt law authorizing the government to borrow. The law expired in 2017 limiting the government’s financing options.
Some GCC governments have accumulated large pools of financial assets due to their hydrocarbon wealth, which they can use to fund their fiscal deficits. In some cases, we have seen government assets in Kuwait, Abu Dhabi, Qatar, and Saudi Arabia exceed government debt by a wide margin, whereas in Bahrain and Oman, their debt exceeds their assets.
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 volatile and accommodative monetary policy across the globe has reduced the cost of raising funds.
Governments may also be reluctant to liquidate pools of assets they have earmarked for use by future generations. We assume that, in times of financial stress, governments would amend laws or historical practices and liquidate these assets to support government debt service.