World Economy

(P)GCC States to Raise $50b to Reduce Deficits

The combined deficit of the six (P)GCC states is forecast to hit $153 billion this year, up from $119 billion last year
(P)GCC States to Raise $50b to Reduce Deficits (P)GCC States to Raise $50b to Reduce Deficits

Persian Gulf Arab states are planning to raise funds worth $50 billion by way of bond issues to reduce deficits which are expected to grow with oil prices remaining relatively low, according to a study conducted by Fisch Asset Management, one of the world’s leading credit analysis and convertible bond specialists.

The equity and bond markets of the UAE emirates of Abu Dhabi and Dubai; Kuwait and Saudi Arabia between mid-August and late September also showed a decline, news outlets reported.

With falling crude oil prices, the (Persian) Gulf Cooperation Council states (Saudi Arabia, Kuwait, the UAE, Qatar, Bahrain, and Oman) deficits are expected to grow, with sovereigns and corporates likely to lever up. This will lead to further rating downgrades.

While the pipeline for new issuances for the end of the year is valued at around $50 billion, most global debt investors will continue to take a cautious approach to (P)GCC issuers.

“It’s true that the (P)GCC debt market still looks good compared to negative yields in developed markets, but regional credits have had a substantial rally with the huge overhang of new issuances that we’ve been waiting to see before the year-end,” said Philipp Good, head of Portfolio Management at Fisch.

“We think there will probably be some repricing. Global debt markets are uncertain at the moment, in part due to the United States election, the Italian referendum and the problems experienced by Deutsche Bank,” he added.

“While bond yields in the (P)GCC still look attractive compared with other markets, investors need to believe in issuers—for example, the reforms scheduled for the Saudi economy.

Bonds ultimately need buyers, and that means the market needs to be in the right shape—not just the pricing.


Money Markets Slowing

(P)GCC money markets are slowing down, with softening of foreign exchange, credit default swap, corporate bond and equity market pricing resulting from continued macro-economic uncertainty, the report said.

A UAE case study by Fisch’s wholly owned subsidiary, I-CV, focused on Abu Dhabi Commercial Bank as a potential issuer. The review concluded that ADCB had a good market position in the UAE’s relatively stable economic environment, but that slumping oil prices and declining liquidity would result in moderate deterioration of asset quality—as it would for most UAE banks.

“We view ADCB as one of the strongest banks in the region with a very strong brand recognition. Our assessment maintained a stand-alone rating of BBB for ADCB in view of the bank’s high equity ratio and reserve coverage,” Good added.

“Our A- rating for senior unsecured debt also remained unchanged, based on the bank’s ownership structure and historical support. Our assessment for most of the major UAE banks is broadly similar,” he added.

Deficits to Rise

The (P)GCC oil exporters’ budget deficits are expected to peak this year because of the plunge in energy revenue.

The combined deficit of the six (P)GCC states is forecast to hit $153 billion this year, up from $119 billion last year, Kuwait’s investment firm Kamco Research said recently.

The OPEC kingpin Saudi Arabia is expected to account for 55%, or more than $84 billion, of the shortfall.

Last year, the world’s top crude exporter posted a record deficit of $100 billion.

The (P)GCC deficit will start easing from next year, but the six nations are forecast to post an average annual shortfall of $100 billion until 2021, the company said.

The (P)GCC countries together pump more than 18 million barrels per day of crude oil.

(P)GCC total revenue, mainly from hydrocarbons, dropped from a peak of $735 billion in 2013 to just $443 billion last year, the lowest in five years, Kamco said. They are forecast to slide further to $365 billion this year.


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