GCC funding needs could reach $560bn between 2015-2019 – S&P

GCC governments have been seeing a strong rise in their funding requirements since 2015 due to the drop in oil prices, ratings agency S&P has said in a new report.

The drop in oil-related revenue has seen many Gulf states report deficits, with S&P estimating that – in nominal terms – GCC sovereigns’ combined fiscal deficit will reach $150bn (12.8 per cent of combined GDP) in 2016.

“We forecast that the cumulative funding requirement could be as high as $560bn between 2015 and 2019,” the report said. The majority of that amount will pertain to Saudi Arabia.

During that period, S&P estimates that Bahrain’s net debt position is anticipated to more than double, Oman’s net asset position will reduce to nearly zero, Saudi Arabia’s net asset position will weaken by 30 per cent and Kuwait’s will decline by nearly 20 per cent.

The impact on Abu Dhabi and Qatar’s net asset positions will be more moderate.

“The resulting imbalances and their likely impact 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,” it added.

While governments will predominantly use debt financing to cover the gap, tighter domestic and international liquidity conditions could complicate such plans.

S&P forecasts that Qatar and Bahrain will finance the vast majority of their deficits through debt, whereas Oman, Saudi and Abu Dhabi will have a fairly even split of asset and debt financing. Kuwait is anticipated to use its assets to pay for most of its deficits.

Looking ahead, due to the region’s strong dependence on hydrocarbons, fiscal funding needs will stay elevated for a “prolonged period”, the report noted.

Central government accounts will remain in deficit in 2019, although to a lesser extent than in 2016.

“In our view, the efficacy of government policy as well as the development of oil prices will determine how long this situation will persist,” it said.

The report anticipates a gradual recovery of oil prices – set to increase to $55 per barrel in 2019 from $42.5 for the rest of 2016.

“For the most part, we expect that government measures to counter lower revenues will likely bear fruit, but over a fairly long time frame,” S&P said.

“This is because growth-boosting capital expenditures in the region are set to remain high and current expenditures are frequently subject to political considerations, which can hamper speedy implementation,” it added.