Gulf economies face testing times

Although fiscal deficits loom over Gulf economies, their low levels of debt should help them through. Published in MEED, 24 February 2014

The Middle East and North Africa region has some of the most indebted governments in the world, but also some of the least. As with so many aspects of life in the region the difference between the two comes down to luck more than judgement – the presence or absence of oil is the best indicator of whether a country’s public finances are in a healthy state.

When viewed in terms of general government net debt, the best-placed country in the region is the UAE, which had a net debt of about -107 per cent of GDP last year, according to the Washington-based IMF. That means the government’s financial assets far exceed its gross debt, which stands at about 18 per cent of GDP. Around the world, only Norway manages to do better, with a net figure of -175 per cent.

Top performers

The UAE is closely followed by Libya with a net debt of -100 per cent of GDP and Saudi Arabia with -61 per cent. These two countries are third and fourth in the world according to the IMF. Algeria also performs well, with a net government debt of -27 per cent of GDP last year, while Iran and Qatar are also in relatively strong positions.

At the other end of the scale sit some of the region’s weakest economies. Last year, Lebanon had a net government debt of 136 per cent of GDP and the figure is expected to climb towards 140 per cent in the coming years. The only authorities around the world that are more exposed than Beirut’s are those in Tokyo and Athens. Japan’s net government debt is about 143 per cent of GDP and also growing. The figure for Greece was 176 per cent of GDP last year, but it is at least expected to fall in the coming years and should drop below Lebanon’s by 2018.

The Lebanese government’s debt levels had also been falling in recent years. From a high of 182 per cent in 2006, the gross debt ratio dropped to 138 per cent of GDP in 2011 and the net debt figure was on a similar trajectory. Since then, however, debt has again been climbing as the government has struggled to deal with an underperforming economy and large numbers of Syrian refugees.

With weak political leadership in Beirut, the situation is likely to get worse rather than better. The local Byblos Bank says gross public debt had reached $63.5bn by the end of 2013. The $5.8bn increase over the year was a 10 per cent rise on the same time a year before and marked an acceleration over previous years. In 2012, gross debt grew by $4bn or 7.5 per cent, while in 2011 it was up by $1bn, an annual growth rate of about 2 per cent.

Whether the recently appointed government in Beirut can do much to address the country’s perilous financial position is questionable. Tammam Salam finally took over as prime minister on 15 February, after the country had spent almost a year under a caretaker government while he tried to piece together a viable coalition. Lebanon’s recent history suggests he will have a hard time making much progress while in office. The country is host to 930,000 refugees from the war in Syria. That conflict is being echoed in the splintered Lebanese population itself and the risk of sectarian conflict breaking out remains very real.

The one thing that has gone in Lebanon’s favour is that the country’s banks have been enthusiastic buyers of government debt, which has enabled the state to carry on running large budget deficits. Overall, local currency debt accounted for 59 per cent of total government debt at the end of 2013, according to Byblos Bank. Local commercial lenders held about 53 per cent of that and Banque Du Liban, the central bank, a further 31 per cent.

The other weak performers in the region are Jordan, where net debt is about 80 per cent of GDP, and Egypt, where it is 75 per cent. In the middle ground sit countries such as Morocco, Bahrain and Yemen.

However, the gap between some of the rich Gulf countries and the weaker economies of the Levant and North Africa may start to close slightly in the coming years. The ruling families in the Gulf have significantly ramped up their spending during the past three years, in an effort to keep locals happy and avoid the sort of demonstrations that toppled other governments during the 2011 uprisings. They have been helped by historically high oil prices of more than $100 a barrel for most of that time.

Looming deficits

Yet even those prices are not enough to cover the rising cost of subsidies, public sector pay increases, unemployment and housing benefits and other handouts. The signs are that the Gulf governments are edging ever closer to fiscal deficits. At that point, the authorities will be faced with a choice of dipping into their substantial reserves or issuing debt to balance the books.

Just how quickly all this might happen is open to debate, but it is likely to be sooner rather than later. A number of economists are predicting that Riyadh will start running a fiscal deficit in the next few years, for example. One Saudi bank, Samba, says it is likely to happen in 2015, while another, Jadwa Investment, thinks it will occur a year later, in 2016. For Riyadh, however, it should not be a problem to finance any new debt. “They do have savings that could be run down and they also have a lot of domestic appetite for bond issues,” says James Reeve, deputy chief economist at Samba.

Other GCC states are in a similar fiscal position, but not all will find it as comfortable to deal with deficits. Oman and Bahrain are on the verge of running large deficits if oil prices fall very far and neither has the sort of reserves that Saudi Arabia can draw on.

Of course, overall debt levels do not tell the full story of a country’s fiscal strength or weakness. Egypt has been receiving large amounts of aid from the Gulf countries, which has eased its financial position, but it is still issuing a lot of debt. According to London-based Capital Economics, the yield on one-year treasury bills has dropped from more than 14 per cent before the second revolution in July last year, when the army ousted President Mohamed Mursi, to about 11 per cent at the moment.

Bond issuance

In an apparent move to take advantage of these lower borrowing costs, the Finance Ministry in Cairo has said it plans to issue £E203bn ($29bn) in treasury bills and bonds in the first quarter of this year, 40 per cent more than in the same period of 2013. As in Lebanon, local banks have been happy to buy government debt instruments in the past and Capital Economics expects that situation to continue in the future.

The overall picture for Cairo is one of rising debt levels and an extremely weak fiscal position in a country where political instability is an ongoing concern. As a result, Egypt remains classed among the highly speculative issuers according to major US credit ratings agencies. It has a long-term foreign currency rating of B- from Standard & Poor’s and Fitch Ratings, and a Caa1 rating from Moody’s Investors Service.

In total, 11 countries around the region have a credit rating from one of these three organisations. The oil-rich GCC states of the UAE, Qatar, Kuwait and Saudi Arabia are all ranked among the high-grade issuers. Below them come Oman and Bahrain with medium-grade ratings. The remaining countries – Tunisia, Morocco, Jordan, Egypt and Lebanon – are all classed at speculative non-investment grades, or junk status as it is sometimes known. That makes it more expensive for these countries to issue debt.

In addition, three of the UAE’s seven emirates are also rated. Unsurprisingly, given its oil wealth, Abu Dhabi has the highest marks, with high-grade ratings from all three agencies. But Sharjah and Ras al-Khaimah also do well, not least because of the expectation that Abu Dhabi will help them in the event of any fiscal problems.

Dubai recovery

Dubai, meanwhile, does not have a rating, but continues to work through the problems caused by its ill-starred borrowing binge before the 2008 crash. According to Samba, the emirate’s debts now account for about 55 per cent of GDP, the majority of which are loans from the Central Bank of the UAE and the Abu Dhabi government. Dubai’s government-related entities need to make about $8bn in repayments this year. That may yet prove troublesome for some of them, but it should not derail the ongoing recovery in the emirate’s economy.