Market analysis: GCC budgets to resume spending and plug gaps with bond sales

With oil prices rising in 2016, lgovernments across the Arabian Gulf generally announced expansionary budgets at the end of last year.

Qatar is increasing its infrastructure spending in preparation for the World Cup in 2022. Lars Baron / Getty Images

Following two years of relative belt-tightening, Arabian Gulf governments have announced increased budgets for 2017 that are likely to boost spending in health care, education and infrastructure and create investment opportunities in these sectors.

Meanwhile, continuing deficits mean that sovereign bond issuance is likely to gather pace.

With oil prices rising in 2016, largely because of an Opec agreement on production cuts, governments across the Arabian Gulf generally announced expansionary budgets at the end of last year, with a focus on improving quality of life and education.

Policymakers are trying to strike a balance between the need for higher expenditure on essential projects and reducing budget deficits, which had been rare over the previous decade while crude oil hovered above the US$100 per barrel mark. At the same time, public policy is firmly weighted towards a re­alignment of economies to non-oil sectors, with the hope that these will contribute an ever-increasing share of government coffers.

Sharjah announced that spending on infrastructure would increase by 7 per cent from last year and represent 30 per cent of the budget. Its budget focuses on economic development initiatives, which accounted for 41 per cent of the total, and to create 1,800 new government jobs for Emiratis.

The UAE’s 2017 federal budget projects revenue of Dh47.7 billion against expenditure of Dh48.7bn, with the majority of spending earmarked for investment in health care, education and human capital development.

Abu Dhabi has yet to announce its budget, but the emirate is expected to post a deficit of about 6 per cent this year. Its budget spending is forecast to grow by 3 per cent, having declined in each of the past two years.

Dubai announced in December a Dh47bn budget, with construction a key component, as the emirate gears up to host Expo 2020. Dubai is likely to post a small deficit of 0.6 per cent of GDP this year.

Similarly, Saudi Arabia announced plans to spend 890bn Saudi riyals this year, against revenue of 680bn riyals, with key priorities including the National Transformation Plan, social infrastructure and job creation. The budget assumes an average oil price of US$57 per barrel for the year, while selective taxes and revenue from non-oil sectors are expected to account for 50 per cent of total revenue by the end of the decade.

Qatar’s budget envisions expenditure of 198bn Qatari riyals on revenue of 170bn riyals, assuming an oil price of $45 per barrel. Education, health and infrastructure will account for nearly half of all expenditures, at 87.1bn riyals, and will include building projects for Qatar’s hosting of the 2022 Fifa World Cup.

There could be tangible benefits for well-placed companies in specific sectors. For example, in the UAE, the property developer Emaar and the investment firm Dubai Investments are likely to benefit from the construction activity leading up to Expo 2020. In Saudi Arabia, healthcare companies such as Al Mouwassat and Al Hammadi could benefit from higher government spending on health care.

The increased budgets should also benefit companies that have suffered cashflow problems because of delayed payments for government contracts. We have already seen significant improvement in Saudi Arabia, where payments to the construction and other sectors resumed in the fourth quarter of last year. About 30 to 40 per cent of the outstanding dues were to be paid by end of last year, with the balance to be paid this year. This resumption of payments was aided by improvements in domestic funding conditions, which in turn was helped by bond sales.

Growing budget spending across the region, albeit following significant declines over the past two years, will help to underpin activity in the wider economy, and a natural beneficiary from this would be the banking sector.

In addition, with deficits continuing, sovereign bond issuances are likely to continue to gather pace and scale. Equity market investors will also be watching for potential privatisation in the next couple of years, including preparations for the Saudi Aramco initial public offering, which is scheduled for 2018.

GCC issuers sold a record $72bn of bond sales last year, with a significant portion coming from sovereigns as the region’s fiscal deficit hit a combined $193bn. The UAE, Saudi Arabia, Bahrain, Oman and Qatar all issued Eurobonds last year and we can expect more this year. Kuwait, which has not yet tapped the Eurobond market, is eyeing an issue of between $5bn and $10bn in the first half of this year. Meanwhile, Oman is in discussion with advisers over another bond sale, while Saudi Arabia’s economy minister announced last month that the country would probably issue up to $15bn of bonds this year.

Mohammed Al Hashemi is the executive director of Invest AD Asset Management

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