Fitch Ratings-Hong Kong: Government-related entity (GRE) debt is a significant and growing contingent liability for some governments of the Gulf Cooperation Council (GCC), Fitch Ratings says in a new report.
The high public sector debt reflects heavy state involvement in the economy and the use of GREs as a key tool of economic policy. Fitch estimates that non-bank GRE debt in 2018 ranged from 12% of GDP in Kuwait to 32% of GDP in Oman.
Debt of government-related banks (wholesale or interbank funding, excluding customer deposits) ranged from 9% of GDP in Bahrain to 39% of GDP in Qatar in 2018. The potential scope of contingent liabilities from the banking sector is even larger, with sector total assets ranging from 74% of GDP in Saudi Arabia to 209% of GDP in Bahrain.
Non-bank GRE debt has been increasing in countries whose governments are themselves facing fiscal pressures that limit the ability of governments to make direct capital contributions to the GREs, prompting the latter to finance themselves through borrowing instead. In our view, increased GRE borrowing could also reflect quasi-fiscal spending by some GREs. In 2015-2018, non-bank GRE debt expanded by 15% of GDP in Bahrain and 8% of GDP in Oman and Saudi Arabia.
All GCC states have a record of supporting their GREs, either on an ongoing basis or in periods of distress. The likelihood of future assistance is high given past experience, the continuing importance of GREs to national economic growth strategies and, frequently, their status as national champions.
Large sovereign net foreign assets and low net debt limit the credit impact of large or growing contingent liabilities, notably for Abu Dhabi, Qatar and Kuwait. GREs have assets as well as liabilities. The high standalone credit quality of some GREs, in particular most of the national oil companies in the region, is also a mitigating factor.
Nevertheless, many GCC sovereigns rely on exceptional balance-sheet strengths to outweigh structural weaknesses, including undiversified economies and political risk. A large build-up of GRE debt or crystallisation of GRE debt into government debt could undermine the magnitude of these strengths, potentially leading to a negative rating action.
Fitch does not usually include GRE debt in government debt, unless it is guaranteed and likely to materialise onto a government's balance sheet. Contingent liabilities could crystallise if a government directly assumes the obligations of a GRE, or if it needs to make transfers that widen its fiscal deficit. Other contingent liabilities not considered in this report include liabilities arising from pension funds (most of which run actuarial deficits in the GCC) or public-private partnerships (eg power purchase agreements).
According to Fitch's Sovereign Rating Criteria, contingent liabilities may lead to an adjustment to the Sovereign Rating Model (SRM) score through the Qualitative Overlay (QO), even before such contingent liabilities have fully materialised. No GCC sovereign rating is currently subject to such adjustment.
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© Press Release 2019
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