Sunday, Jul 24, 2016

Dubai: GCC countries are increasingly turning to debt markets both domestic and foreign to finance their rising fiscal deficits and the trend is likely to persist in the short to medium term according to the latest Capital Flows to Emerging Markets report from the Institute of International Finance (IIF).

The drop in oil prices since mid-2014 has shifted the large aggregate current account surpluses of GCC countries in the past decade to a deficit of $35 billion (Dh128.5 billion) in 2015, and the deficit is expected to widen to $89 billion or 6.5 per cent of the GDP in 2016, according to the IIF estimates.

The large resident capital outflows in the form of investments which peaked at $384 billion in 2013 have virtually disappeared and international reserves are being used to fund widening deficits.

Unlike in 2015, the GCC countries are now relying more on external borrowing to finance the projected $182 billion fiscal deficit, which amounts to 13 per cent of GDP excluding investment income. The increasing reliance on external borrowings including debt issuance in foreign markets is expected to ease liquidity pressures on the local banking systems.

“This shift [to external borrowings] reduces the call on local banks to provide government financing, clearing space for private sector lending to support non-oil economies,” said Garbis Iradian, Chief Economist, Middle East and North Africa, IIF.

“For this year, we expect foreign borrowing to rise to $48 billion. As a result, the external debt-to-GDP ratio is expected rise to 46 per cent in 2016, from 39 per cent in 2015,” said Iradian.

Sovereign investors

In general GCC authorities have chosen not to tap their large SWFs and investment income to finance the deficit for 2016. While the challenging macroeconomic environment, driven by the sustained low oil price, has impacted on global sovereign investment performance, with average annual portfolio returns having fallen, Middle East sovereign investors remain better prepared in terms of investment capability. According to a recent study by Invesco on average new funding accounted for 3 per cent of assets, while the average sovereign investor withdrew or cancelled only 7 per cent of assets, indicating regional sovereign have been coping rather well with funding challenges.

The IIF expect private non-resident capital flows to the GCC to increase to $110 billion in 2016 from $80 billion in 2015, driven largely by the issuance of international bonds. Equity inflows should also rise significantly, albeit from low levels, as the Saudi market (the largest in the region) is gradually opening up — foreigners have been allowed to buy shares listed on the Tadawul stock market since early 2016. The planned sale of an initial 5 per cent stake in the state-owned oil giant Saudi Aramco is expected in 2017 or 2018, as part of Saudi Arabia’s 2030 strategy to diversify its economy.

With oil prices expected to remain around current levels for the foreseeable future, GCC authorities are implementing serious fiscal adjustment measures to put their finances on a more sustainable footing. Even so, fiscal and current account deficits are likely to decline only gradually, and the GCC countries are likely to need to continue to rely on substantial foreign borrowing in the years ahead.

By Babu Das Augustine Banking Editor

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