Widening fiscal deficits in Gulf Cooperation Council (GCC) states, brought on by persistent low oil prices, will lead to a cumulative funding requirement in excess of half-a-trillion dollars in the next three years, says rating agency Standard & Poor’s (S&P).
The latest analysis from S&P shows that since 2015, with the drop in oil revenues that turned surpluses into deficits, the region’s funding requirement has been growing. According to the agency’s analysis, in 2016 alone, the combined fiscal deficit of GCC sovereigns, in nominal terms, will reach $150 billion or 12.8 percent of their combined GDP.
The rating agency added that per country, as a proportion of GDP, these deficits are expected to average around 10 percent per year in Bahrain, Oman, Kuwait, and Saudi Arabia, and 4 percent on average in UAE and Qatar over 2016-2019 period.
The report estimated that, as a result of burgeoning deficits and the region’s overwhelming dependence on hydrocarbons, GCC sovereigns’ financing needs will likely remain “substantial” and could likely reach $560 billion, over the years to 2019. The bulk of this funding requirement is likely to come from Saudi Arabia.
However, with GCC sovereigns likely to resort predominantly to debt financing of their deficits, tighter domestic and international liquidity conditions could complicate these plans. “This creates uncertainty about how, and at what price, GCC sovereigns will cover their fiscal deficits.”
“The resulting imbalances [from deficit positions] have been central to our view of a significant deterioration in the region’s creditworthiness over the past 18 months,” the report said.
“Although most governments’ balance sheets remain a rating strength, the related assets are finite. Furthermore, international liquidity sources could start to dry up at a time when foreign inflows are most needed and the liquidity of domestic banking systems is diminishing.
The analysis also showed that over 2015 to 2019, Bahrain’s net debt position is expected to more than double, Oman’s net asset position to reduce to nearly zero, Saudi Arabia’s net asset position to weaken by 30 percent and Kuwait’s to decline by nearly 20 percent. The impact on UAE’s and Qatar’s net asset positions will be more moderate.
However, the agency said that apart from Oman and Bahrain, GCC governments still have substantial reserves at their disposal, which could help tide things over for a while.