GCC borrowing needs set to plunge 96% on oil rally above $65

The GCC’s borrowing requirements could drop to $10 billion over the next three years from about $270 billion, if oil prices continue to stay elevated, according to Goldman Sachs Group.

If prices for the commodity average $65 a barrel and all else is equal, borrowing needs for the six GCC countries would drop 96 per cent from what they would be if oil traded at $45, Farouk Soussa, an economist at the bank wrote in a report.

In 2020, Gulf sovereigns raised about $63 billion in bonds and sukuk as oil prices plummeted.

Oil prices have rallied almost 80 per cent since the start of November to about $70 a barrel as major economies rolled out coronavirus vaccines and the Opec implemented deep production cuts.

The shock move by Opec+ triggered a rally in Brent prices higher than annual average levels needed for the region’s largest producers, including Saudi Arabia, to balance their budgets this year

The average price needed to balance GCC members’ current accounts is lower at $50 per barrel, Goldman said, giving comfort regarding the external outlook and the resilience of currency pegs, even if prices decline from current levels.

“The implications for sovereign balance sheets, creditworthiness and debt markets would be significant,” according to Soussa, “but we highlight the likelihood that some of the fiscal space afforded by higher oil prices is likely to be erased by higher spending.”

Rystad Energy analyst said the crucial Opec+ meeting’s outcome is a win for the restraint-minded Saudi Arabia and other supply doves in the group, who are happy to see oil prices near $70 per barrel to plump up ailing budget deficits. At the same time, the decision seems to keep everybody happy as both Russia and Saudi Arabia kind of both got it their way.

If oil prices stay at current levels, “we would see fiscal surpluses for the larger GCC economies,” said Monica Malik, chief economist at Abu Dhabi Commercial Bank.

“This provides more fiscal space to support economic activity and recovery."

Analysts at Goldman Sachs Group Inc. and JPMorgan Chase & Co. raised their price forecasts for Brent after the Opec decision, while Citigroup Inc. said crude could top $70 before the end of this month.

Budget deficits in the Arab Gulf, where economies are reliant on oil, widened after prices crashed. Opec+ agreed last year to take about a tenth of global supply off the market to stem the plunge and while the group has slowly rolled back some of those cuts, it is curtailing more than seven million barrels of daily production.

According to Goldman Sachs, Kuwait is likely to have the biggest improvement in its budget balance from high oil levels, with its shortfall narrowing by around 15 percentage points of gross domestic product this year. Still, the sovereign is facing a liquidity squeeze that “cannot be remedied by higher oil prices alone.”

Over the next three years, Saudi Arabia’s net debt is seen rising to a “still manageable” level at 38 per cent of GDP. Qatar’s fiscal balance is seen swinging from a 5.0 per cent deficit to a surplus of 5.0 per cent of GDP. Oman and Bahrain will probably benefit most from higher oil prices, given their weaker external and fiscal positions.

Other countries in the region are seen having a “more modest improvement” of between 2-4 percentage points of GDP compared with official budgeting.