Lower oil prices has altered the fiscal landscape of GCC countries as the huge fiscal surplus registered in erstwhile years has flipped into deficits. GCC governments are expected to raise between $260bn – $ 400bn in debt cumulatively through 2020 by issuance of local and international debt/bonds. This is a significant jump relative to $72.1bn raised cumulatively during the period 2008-2014, Marmore MENA Intelligence noted. Between 2016 and 2017, GCC countries are expected to post a fiscal deficit of $302bn.
According to Marmore’s report on 'Financing Options in GGC,' the budgetary deficits have forced the government to fix their deficits through debt issuance in both the domestic and international markets. The sudden spurt in debt issuance by the government and its related entities might be overwhelming for the domestic financial markets as evidenced by the spurt in short-term banking rates. Domestic banks that enjoy support from the governments have also been affected as the deposit mobilisation process has slowed down.
Subscription of domestic bonds issued by the governments has constrained the ability of banks to extend credit facilities as the loans-to-deposit ratio for banks across the region has reached the stipulated limits. Consequently, the banks themselves are issuing bonds to increase their capital ahead of various upcoming regulatory requirements. Though, the banks are well capitalized they may not be able to act as the dominant source of funding avenue.
In the case of Qatar, Oman and UAE where the loan-to-deposit ratio is much higher than 100 percent it would be difficult for banks to subscribe to state debt. They could take on government debt only at the expense of private credit growth.
GCC countries, though comparable to most of the developed world in many aspects, fall short when it comes to the development of financial markets. The year 2015 saw the dampening of optimism and lower appetite for IPOs in the GCC countries as compared to the year 2014. There were only 6 IPOs in 2015 in the GCC region as compared to 1,144 IPOs globally in 2015 and 16 IPOs in GCC region, a year ago. This is largely attributed to the fall in price of oil which started in the second half of 2014. This led to a decrease in investor confidence and many IPOs were cancelled.
Private equity in the region is still at a nascent stage, though it showed some good progress between 2002 and 2008. Issuance of corporate bonds, including sukuks, in the GCC are also largely restricted to the bigger companies. Other financing forms such as project bonds have gained prominence. Generally, these project bonds offer long-term investors attractive yields and significant credit spreads.
