(P)GCC Real GDP Growth to Stay Weak This Year

The real GDP growth in the (Persian) Gulf Cooperation Council states in 2017-18 is likely to remain weak by historical standards with an average of 1.6% and ranging from 0.7% for Saudi Arabia to 3.3% for Qatar, a Moody’s report said.

The negative outlook for sovereign creditworthiness in 2017 in the (P)GCC states (Saudi Arabia, Kuwait, UAE, Qatar, Bahrain and Oman) reflects continued headwinds from subdued growth and challenges to further fiscal and structural reforms, said Moody’s Investors Service in its annual (P)GCC Sovereign Outlook, published Monday, TradeArabia reported.

Moody’s report, “Sovereigns—(Persian) Gulf Cooperation Council: 2017 Outlook—Subdued Growth and Fiscal Pressures Drive Negative Outlook,” is an update to the markets and does not constitute a rating action, it said.

“We expect real GDP growth in the (P)GCC in 2017-18 to remain weak by historical standards with an average of 1.6% and ranging from 0.7% for Saudi Arabia to 3.3% for Qatar,” said Mathias Angonin, Analyst at Moody’s.

Furthermore, Moody’s estimates the (P)GCC’s aggregate fiscal deficit will narrow to 7.5% of GDP in 2017 and 4.9% in 2018, from 8.8% of GDP in 2016 and 8.7% of GDP in 2015, mainly as a result of higher oil prices.

Challenges to fiscal deficit reduction stem from potential slipping of fiscal consolidation measures in the face of social pressures, it said.

Fiscal deficits will remain sizeable in Saudi Arabia, Bahrain and Oman given challenges to further consolidation from comparatively lower per capita incomes than in the higher-rated (P)GCC members and potential social tensions.

The UAE, Qatar and Kuwait will likely record relatively low fiscal deficits of 3% to 4% of GDP in 2017, it said.

  Debt Volumes

Debt issuance volumes will be lower in 2017 and 2018 compared to 2016, helped by the expected reduction in fiscal deficits. According to Moody’s estimates, the debt-to-GDP ratio across the (P)GCC will rise to 31.6% by 2018 from just 10.5% in 2014, adding another $154 billion in government debt in 2017 and 2018. Qatar and Bahrain will likely continue to rely solely on market funding whereas Saudi Arabia, Oman, the UAE and Kuwait will issue debt and make use of government reserves.

Saudi Arabia and Bahrain will record the largest increase in debt between 2016 and 2018, with the government debt-to-GDP ratio rising by around 14 percentage points, Moody’s said. For Oman and Kuwait, Moody’s expects lower debt increases of around 8-9 percentage points of GDP.

The debt burdens of the UAE and Qatar, on the other hand, are expected to stabilize in 2017—having pre-financed part of their 2017 deficits—and decline in 2018.

Moody’s projects that (P)GCC-wide government financial assets will decline to $2.1 trillion by the end of 2017, down from $2.4 trillion in 2014. This will lead to a weakening net asset position for all (P)GCC sovereigns but most pronounced in Saudi Arabia and Oman.

  Adjust to Low Oil Prices

(P)GCC nations have endured a difficult time economically as the slump in oil prices has forced governments to adjust to the new era of lower oil prices.

Countries have been encouraged by agencies such as the IMF to accelerate structural reforms to diversify their economies away from petrochemicals, boost the functional role of the private sector, and create jobs.

Another strategy implemented by (P)GCC governments was to issue international bonds to ease the burden on fiscal reserves and improve overall market liquidity. Saudi Arabia made headlines when it issued international bonds at a grand scale believed to be worth $17.5 billion, which was the biggest bond sale from an emerging market nation.

Qatar also raised $9 billion in sovereign bonds, Abu Dhabi sold $5 billion worth of sovereign bonds, and Kuwait’s planned bond issue worth $9.9 billion has been delayed until 2017.

In Saudi Arabia, strict austerity measures were implemented which included reducing minister’s salaries, decreasing capital expenditures, and delaying paying contractors for construction projects. The Saudi budget for 2017 indicates that austerity measures will continue to take place as subsidies on utilities such as water and electricity will be partially reduced and fuel prices are expected to rise by 40%.