GCC likely to continue issuing debt despite oil price rebound

Move helps banks to focus on private sector lending, says Capital Economics

A 3D printed oil pump jack is placed on dollar banknotes in this illustration picture, April 14, 2020.

A 3D printed oil pump jack is placed on dollar banknotes in this illustration picture, April 14, 2020.

REUTERS/Dado Ruvic/Illustration

Dollar bond issuance in the GCC region has gotten off to a quick start this year with Saudi Arabia, Oman, and Bahrain selling a total of $10.25 billion in bonds over the past month, according to a report by London-based consultancy Capital Economics.

"If oil prices continue to rise, as we expect, budget deficits will narrow and reduce governments' financing needs. But we think that policymakers will continue to lean on international bond issuance to plug remaining shortfalls," said William Jackson in the report Tuesday.

The dollar receipts can be used to plug both budget and current account deficits, helping to defend of dollar pegs without needing to reduce FX reserves. Also, it allows governments to avoid leaning on local banks to absorb sovereign debt, reducing the risk of crowding out lending to the private sector. "Public debt-to-GDP ratios will rise but, aside from Bahrain and Oman, this is not a major cause for concern," said Jackson.

In Saudi Arabia, Q4 flash GDP figures showed that the economy continued to recover, but output was still around 4 percent below its level a year earlier. "Monthly activity figures would suggest the modest recovery in non-oil sector still managed to offset weaker oil production."

The UAE's economic recovery has been put on hold as the worsening COVID-19 outbreak has led to a sharp tightening of virus restrictions. It is a similar story in Qatar, although sentiment appears to have improved following the lifting of the Saudi-led blockade, said Jackson.

In the rest of the Gulf, the rise in the price of Brent crude will help to rein in large twin budget and current account deficits. But non-oil sectors are still struggling. Deflation has persisted in Oman and Bahrain, although the introduction of VAT in April will cause a jump in the headline rate in the former, the report said.

According to a report by Kuwait Financial Centre last month sovereign issuances by GCC entities amounted to $66.3 billion during 2020 amid growing budget deficits ensuing from COVID-19 and lower oil prices, up 25 percent year-on-year from $52.9 billion raised during 2019.

(Writing by Brinda Darasha; editing by Daniel Luiz)


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