GCC debt issuance expected to pick up in 2019

January 10, 2019

DOHA: Bond issuance in the GCC remained high in 2018, slightly down from 2017. With lower oil prices, higher issuances are expected in 2019, Institute of International Finance (IIF) noted in its ‘GCC forecast update.’

With previously issued bonds starting to mature in 2021, GCC countries have a short window of opportunity to consolidate their state budgets.

In the face of 2018’s emerging markets sell-off, higher oil prices and durable dollar pegs offset some of the upward yield pressure in the GCC. J P Morgan’s announced inclusion of five GCC countries in its prominent Emerging Market Bond Index (EMBI) could bring another $30bn in inflows to the region, the IIF analysts said.

Although outperforming emerging markets (EMs) on aggregate in 2018, individual GCC stock markets had mixed results. Dubai (DFM) had one of the worst years due to a real estate slump, while Abu Dhabi and Saudi Arabia stood among the few EMs with positive returns in 2018. However, the Saudi equity index may not be reaping the full benefits of its MSCI upgrade, as it is lagging comparable historical benchmarks. Even with the risks from lower oil prices, 2019 could bring higher equity inflows.

The external positions will remain strong in Qatar, Kuwait, Saudi Arabia and UAE, despite the lower oil prices. Resident capital outflows will continue to exceed nonresident inflows. While external pressures on Bahrain will be cushioned by the financial aid from its neighbors, Oman is emerging as an increasingly vulnerable spot in the region given its large twin deficits and growing debt.

The banking systems remain sound, with strong capitalization and adequate liquidity, and the gradual pick-up in growth will improve private sector credit demand. However, a further increase in policy rates this year may tighten financial conditions and weigh on credit growth and non-oil economic activity.

Consolidated public foreign assets of the GCC will continue to rise to about $2.8 trillion by 2020 (165 percent of GDP). About half of these assets are managed by sovereign wealth funds with diversified portfolios of public equities and fixed income securities.

The other half is in the form of official reserves and is invested in liquid assets.

Expansionary fiscal policy will continue to drive non-oil growth, as fragile investment sentiment and regional tensions continue to hinder growth of the private non-oil sector.

While a modest fiscal expansion is justified in the short term, consolidation efforts should resume over the medium term. Following the recovery to 2.3 percent in 2018, IIF expects overall growth to moderate to 2.0 percent in 2019, dragged down by compliance with the recent Opec+ deal to cut oil production from October 2018 levels starting January 2019.

According to IIF, higher oil prices in 2018 enabled temporary improvements in the external and fiscal positions. It sees the aggregate current account surplus declining from $153bn in 2018 to $86bn in 2019 due to lower oil prices and export volumes.

IIF also expects the aggregated fiscal deficit to widen again from 1.4 percent of GDP in 2018 to around 4.0 percent in 2019 and 2020, and the public debt to rise to 45 percent of GDP by 2020. The region will continue relying on international and domestic borrowing to fund their deficits.

IIF does not expect a change in the exchange rate regimes in 2019 given still-ample foreign assets and the role the pegs play as an anchor for price and financial stability.

Brent oil prices are expected to average $65 a barrel in 2019 if the Opec+ agreement is fully implemented. However, with US oil shale fields facing an average breakeven price of around $50 a barrel, expansion of drilling in the US could lower oil prices further beyond the near term.

Global trade tensions are likely to indirectly hinder GCC growth. While GCC integration in global supply chains is low, shielding it from the direct impact of tariffs on input costs, a protracted global economic slowdown would reduce the demand for oil and consequently the price.

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