Gulf states set to issue less debt this year after 2020 record high

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Men walk past a closed restaurant in Riyadh, the Saudi capital, on February 5, 2021.

Fayez Nureldine | AFP | Getty Images

Gulf countries issued a record amount of debt last year but won’t have to borrow that much in 2021, analysts who spoke to CNBC said.

This is because the fiscal positions of the Gulf Cooperation Council, or GCC, countries have likely improved thanks to a recovery in oil prices and as the regional economy rebounds from the fallout from the pandemic, they said. declared.

“2020 has been an exceptional year,” Trevor Cullinan, senior GCC sovereign ratings analyst at S&P Global Ratings, told CNBC in February.

“In the future, we don’t think there will be the same need as in 2020,” he said. “We expect fiscal consolidation overall from 2021 to 2023 – we believe deficits will be lower and (and) economic activity will be stronger.”

Record levels of issued debt

Bond issues in the Gulf countries increased sharply in 2020.

According to data from Capital Economics, the total international debt issued by Saudi Arabia, the United Arab Emirates, Qatar, Bahrain and Oman was $ 42.1 billion last year. That’s a 25% increase from $ 33.5 billion in 2019.

“The amount has reached an all time high, driven by higher deficit financing needs resulting from falling oil prices and the impact of Covid-19,” said Scott Livermore, chief economist of Oxford Economics Middle East.

But oil prices have soared due to a harsh winter in the USA and a improving global economic outlook.

These factors offer a “welcome respite” to Gulf budgets, Livermore said.

Benefits of turning to the bond market

Nonetheless, the need for borrowing remains and countries in the region will continue to issue bonds in 2021.

Saudi Arabia has already raised $ 5 billion this year, and reportedly hired banks to sell euro-denominated bonds.

“Gulf governments are still likely to favor international bond issuance over other forms of financing for now,” said James Swanston, Middle East and North Africa economist at Capital Economics.

He said dollar revenue can fill both the budget deficit and the current account deficit, and help the government to better defend its parities with the dollar without drawing on foreign exchange reserves.

Relying on international markets also means local banks don’t have to buy sovereign bonds, he said.

Livermore pointed out that borrowing costs are low and governments in the region can issue bonds to fund diversification programs.

“Countries can also choose to come into (the) market to refinance maturing debt if sentiment remains favorable,” he added.

Effects of taking on debt

Sovereign debt levels in the Gulf are relatively low, Livermore said.

“If refinancing risk is managed effectively by refinancing, then GCC governments should be able to navigate the short term,” he said.

Swanston, of Capital, agreed that higher debt-to-GDP ratios in the region generally do not pose a “major risk”, although he worries about Oman and Bahrain. The debt-to-GDP ratio is a measure of a country’s ability to repay its public debt – a high ratio may indicate that a country might have more difficulty repaying its external debt.

The debt ratios of the governments of the two countries have “risen sharply” in recent years, Swanston said.

The two states have tightened their fiscal policies to manage public finances, he added. “But, some extended period of austerity will be needed to control deficits and public debt.”

Bahrain’s public debt-to-GDP ratio is expected to reach 115% this year, while Oman’s is expected to reach 84%, according to data from S&P Global Ratings.

– CNBC’s Thomas Franck and Eustance Huang contributed to this report.


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