Bahrain, Oman, Saudi to post 12% average deficit in 2016, 2017 – S&P

Bahrain, Oman and Saudi Arabia are expected to post an average fiscal deficit of 12 per cent this year and next year, according to ratings agency Stand & Poor’s.

In its mid-year trends report, the firm said sovereign creditworthiness in the Middle East and North Africa had continued to decline this year, with the average rating now one notch lower than 2015 at BBB, just one position above non-investment grade.

This followed S&P’s lowering of ratings for Saudi Arabia, Oman and Bahrain since January, based on the fiscal impact of low oil prices.

“Absent a substantial increase in the scale and speed of fiscal consolidation, or oil prices, we expect that regional financing needs will remain elevated for some time thereby weakening government balance sheets,” it said. “Creditworthiness in the region is at its lowest ebb since 2003, before hydrocarbon prices embarked on their decade-long climb.”

In Abu Dhabi and Qatar, the firm estimated deficits would average 5 per cent of GDP in 2016 and 2017.

“Given the uniformly high dependence among GCC sovereigns on receipts from hydrocarbon exports, the consequences of a sharp fall in prices are clearly visible in both fiscal and external data,” S&P noted.

The firm said GCC sovereigns continue to face “unprecedented fiscal financing needs”, expected to exceed $100bn in 2016 alone. However, it argued that issuers could be deterred from Eurobond placements for some time due to concerns surrounding growth in China, Brexit and a potential change in chance from key monetary authorities.

Gulf nations have been particularly active in the bond market this year with a $9bn issue from Qatar in May and a number of others by regional sovereigns in the preceding months.

Read: Qatar completes Middle East’s largest ever bond sale

S&P also noted that deposit growth had slowed dramatically in the GCC banking system from the double-digit increases seen from 2012 to 2014, largely due to a decline in deposits from hydrocarbon-linked public sector firms.

It said that balance sheet strength remained a characteristic of the region, but warned “funding deficits with assets alone – if this were possible – would have a marked impact on this strength”.

“Currently, we expect Bahrain’s net debt position to increase almost six-fold between 2014 and 2019, Oman’s net asset position to decline by almost 90 per cent and Saudi Arabia’s by 35 per cent over the same period.”