(P)GCC States Borrow Less

Persian Gulf Arab energy companies retreated from debt markets in the first half of 2018 after a banner year for borrowing as higher oil prices curbed financing needs for existing operations and new projects.

Oil and gas producers, pipeline operators and refiners in (Persian) Gulf Cooperation countries (Kuwait, the United Arab Emirates, Saudi Arabia, Oman, Bahrain and Qatar) borrowed $6 billion through loans and bonds in the first half of 2018, the slowest start in four years, according to data compiled by Bloomberg.

By comparison, US energy companies, driven by resurgent shale production, issued a record $74.3 billion in debt so far in 2018.

The diverging debt appetites between the six Arab exporters and US suppliers shows that (P)GCC, producers are bringing in more cash to finance operations and expansion after crude prices rose 17% this year. It’s also a consequence of the sudden turn in appetite for emerging-market risk this year, raising borrowing costs for issuers across the board.

Higher prices are spurring a debt-fueled surge in US production, which is pumping a record 10.9 million barrels a day and has averaged 10.4 million barrels this year, according to Energy Information Administration data. (P)GCC countries pump about 17 million barrels a day and their energy industries borrowed a record $28.7 billion in 2017, with $12.8 billion in the first half.

Oil and gas producers in the US are far more dependent on debt than (P)GCC exporters. Borrowings in the US tend to rise with oil prices to finance drilling activity, while Persian Gulf Arab producers seek debt when prices are low and companies have to send more cash to their government owners to help plug budget deficits.

Spending to Rise

Oil and gas producers in Saudi Arabia, Kuwait and the UAE plan to spend more than $600 billion on energy projects over the next five to 10 years, officials from the countries have announced. Some of that will be financed by debt, especially for refineries and petrochemical plants, but borrowings will likely be subdued in 2018 because many of the projects won’t begin for a few years, Robin Mills, chief executive officer of Dubai-based consultant Qamar Energy, said.

The biggest borrowing in the (P)GCC this year was a $3 billion loan to Abu Dhabi National Oil Co. UAE-based oil field services providers Shelf Drilling Holdings Ltd. and Borr Drilling Ltd. took out a combined $1.25 billion, Saudi Aramco Total Refining & Petrochemical Co. issued a $150 million revolving credit line, and Kuwait Integrated Petroleum Industries Co. borrowed about $1.3 billion to finance the construction of its liquefied natural gas import terminal.

Debt Rising Steeply

Despite the improved economic forecast, the IMF recently estimated cumulative overall fiscal deficits in the (P)GCC region to be $294 billion in 2018-22, Ameinfo reported.

“Around $71 billion of government debt is expected to mature during the same period,” the IMF said.

“The rapid build-up of debt in many of the Middle East and North Africa countries is a cause for concern. Debt has increased by an average of 10 percentage points of GDP each year since 2013, with countries financing large fiscal deficits,” the IMF report said.

According to the Brookings Institute, for the 2015–2017 period, the (P)GCC  accumulated an estimated $353 billion in fiscal deficits, $76 billion in current account deficits, $270 billion in foreign-exchange reserve losses, and a reduction of $213.3 billion in sovereign financial net worth.

Saudi Arabia has projected a budget deficit of $52 billion in 2018, or 7.3% of GDP. Several mega projects have been left incomplete due to lack of funds.

Kuwait Debt Financing

Kuwait’s parliament last Wednesday passed the budget for the 2018-2019 fiscal year, projecting a huge deficit for the fourth year in a row amid a shrinking economy.

The shortfall for the accounting year, which began in Kuwait on April 1, is estimated at more than $21 billion. The actual deficit may turn out to be lower than forecast with crude currently calculated at about $50 a barrel, $25 below market prices.

State budget revenues are projected at $49.5 billion, up 12% on last year’s estimates, while spending is forecast to reach $71 billion, about 8.5% more than 2016/2017.

After posting healthy surpluses for 16 straight years, Kuwait has posted a budget deficit in each of the past three years after oil prices began to slide in mid-2014. Kuwait’s economic growth contracted by 2.9% last year due to low oil prices.