On February 5, 2021, men walk past a closed restaurant in the Saudi capital Riyadh.
Fayez Nureldine | AFP | Getty Images
According to analysts who spoke to CNBC, the Gulf States took on a record amount of debt in the past year, but won’t have to borrow as much in 2021.
This is because the budgetary positions of the Gulf Cooperation Council (GCC) countries have improved, likely thanks to a recovery in oil prices, and the regional economy has recovered from the aftermath of the pandemic.
“2020 has been an exceptional year,” Trevor Cullinan, lead GCC country ratings analyst for S&P Global Ratings, told CNBC in February.
“We don’t think there will be the same need in the future as in 2020,” he said. “We broadly expect fiscal consolidation between 2021 and 2023 – we expect deficits to be smaller and economic activity to be stronger.”
Record debt
The Gulf States’ bond issues rose significantly in 2020.
According to data from Capital Economics, the total international debt of Saudi Arabia, the United Arab Emirates, Qatar, Bahrain and Oman was $ 42.1 billion last year. That’s 25% more than $ 33.5 billion in 2019.
“The amount hit a record high, reflecting higher deficit funding needs as a result of the collapse in oil prices and the impact of Covid-19,” said Scott Livermore, chief economist at Oxford Economics Middle East.
However, oil prices have risen due to a harsh winter in the US and an improved global economic outlook.
These factors provide “welcome respite” for golf budgets, Livermore said.
Advantages of turning to the bond market
The need for credit remains, however, 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 in preparation for a euro-denominated bond sale.
“For the time being, Gulf governments may prefer to issue international bonds over other forms of financing,” said James Swanston, Middle East and North Africa economist at Capital Economics.
He said dollar revenues can offset both the budget deficit and the current account deficit, and help the government better defend its dollar pegs without resorting to foreign exchange reserves.
Leaning on international markets also means local banks don’t have to buy up government bonds, he said.
Livermore pointed out that borrowing costs are low and governments in the region can issue bonds to fund diversification programs.
“Countries could also choose to enter the market to refinance debt due if sentiment remains favorable,” he added.
Effects of taking on debt
The national debt in the Gulf is relatively low, said Livermore.
“If refinancing is effective in managing rollover risk, GCC governments should be able to navigate in the short term,” he said.
Capital’s Swanston agreed that higher debt ratios in the region are generally not a “major risk”, despite concerns about Oman and Bahrain. The debt to GDP ratio is a measure of a country’s ability to repay public debt. A high ratio can indicate that a country may have a harder time paying its external debt.
National debt ratios in both countries have “risen sharply” in recent years, Swanston said.
Both states have tightened fiscal policies to address public finances, he added. “But it will take a period of sustained austerity to keep deficits and national debt in check.”
According to data from S&P Global Ratings, the debt ratio in Bahrain is expected to reach 115% this year, while that in Oman is expected to reach 84%.
– CNBC’s Thomas Franck and Eustance Huang contributed to this report.
