Saudi Arabia to issue most of new Gulf debt this year, S&P says

Middle East oil exporters lost more than US$360 billion in foregone hydrocarbon revenues last year, the IMF estimates.

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Gulf debt issuance will grow to US$45 billion this year, up from $40bn last year, estimates the ratings agency Standard and Poor’s.

The majority of new debt will come from Saudi Arabia, which will issue $31bn in new debt this year, S&P estimates. The country sold $27bn in local debt last year.

The collapse in oil earnings has opened up wide fiscal deficits in Saudi Arabia.

It ran a deficit of 15 per cent of GDP last year and is expected to run a deficit of 13 per cent this year.

Saudi Arabia initially made up for the shortfall by burning through $115bn of its foreign currency holdings last year. That led the country’s foreign exchange reserves to fall below $600bn in January, their lowest level since 2012.

The Gulf region enjoyed a decade of plenty as oil prices rose steadily between 2003 and 2014 – punctuated only by a steep fall and rapid recovery during the 2008 crisis.

But with oil prices now set to remain below $35 per barrel for longer, Gulf states have had to look to new sources of financing. Middle East oil exporters lost more than $360bn in foregone hydrocarbon revenues last year, the IMF estimates.

“It is not too much of a surprise that debt will rise given that oil is at $35 and most countries are running deficits now,” said Jason Tuvey, emerging markets economist at Capital Economics.

“Most of the Gulf states lowered their debt levels during the boom, which has given them the scope to raise debt now that oil prices are lower.”

Gulf states have very small debt piles by international standards. In 2014, Saudi Arabia’s debt-to-GDP ratio was the lowest in the world, according to IMF estimates.

The UAE is planning to issue its first federal bonds next year, after first passing a federal debt law later this year, according to Ministry of Finance officials.

Bahrain cancelled a $750 million bond sale last month after S&P downgraded its bonds to junk. It later reopened the sale at the lower value of $600m.

Gulf states’ sovereign wealth funds have been returning assets from abroad and are cutting public spending, in a bid to bring their budgets closer to balance. The UAE had cut spending by 21 per cent year-on-year, Ministry of Finance data shows.

The Gulf is also set to introduce a regional sales tax by January 1, 2019, at the latest, Humaid Obaid Al Tayer, the Minister of State for Financial Affairs, said last week. That followed a call by IMF officials and Christine Lagarde, the fund’s managing director, for the region to ready itself for taxes, as its era of plenty comes to an end.

Total government debt in the Middle East and North Africa is set to grow to $667bn by the end of this year, S&P says, a rise of 15 per cent compared with last year.

Egypt, which has struggled for years to rein in its budget deficits, is to issue $34bn in new debt next year, the ratings agency believes. That is a slight decline against last year’s $41bn.

Egypt ran a deficit of 11.8 per cent of GDP in the 2015 fiscal year and has an outstanding debt pile equivalent to 88 per cent of GDP, according to the ratings agency Capital Intelligence.

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