Dubai: The GCC region as whole is facing the prospect of twin deficits, with the exception of a few countries and funding of these will require the use of drawdown of government financial assets and issuance of domestic and foreign debt, according to the International Monetary Fund.
After a significant withdrawal of financial buffers last year, a larger portion of the 2016 fiscal deficits which amount to about $200 billion is likely to be covered by issuing debt. Bahrain, Oman, Qatar, Saudi Arabia, and the UAE (Abu Dhabi) have issued bonds and/or obtained syndicated loans in international markets this year.
“Such diversification of financing sources is appropriate given the greater absorptive capacity of international markets. This strategy will also help ease pressure on domestic banks to finance the deficits. International financing conditions remain broadly favorable for now, but the risks involved with international financing will need to be managed carefully,” Masood Ahmad, Director, Middle East and Central Asia Department of the IMF.
Current Account
The oil price drop has brought about large export losses—oil-related receipts are projected to fall by about $435 billion this year compared with 2014. Consequently, the aggregate current account balance is projected to turn from a surplus of 8.25 per cent of GDP in 2014 to deficits of 4.5 per cent of GDP in 2016 and 1.75 per cent of GDP in 2017.
In the GCC countries, the external adjustment to low oil prices should be accomplished through fiscal consolidation given the long-standing currency pegs and relatively undiversified economies. Countries with a more flexible exchange rate regime can attain some of the external adjustment through exchange rate depreciation, particularly diversified oil exporters.
Last year, Saudi Arabia used extensive reserves to finance their current account deficits, while some others drew assets from their sovereign wealth funds. The increasing international sovereign debt issuance this year, together with the tapping of international markets by government-related entities and the private sector, will help fund the current account shortfalls. Privatization and structural reforms to increase participation by foreign investors in the region would further support capital inflows.
Saudi Arabia has announced its intention to sell a stake in Aramco, the world’s most valuable oil and gas company, while accelerating capital market reforms to ease access for foreign investors. Oman has drafted a foreign investment law to attract investors.
