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World's top oil producers forced to load up on debt

The 70 percent decline in oil prices since mid-2014 has severely dented the finances of major oil producing nations around the world, forcing even the wealthiest producers to move into unplanned borrowing and debt issuance, a new report shows.

The harsh drop in the price of oil, which slumped way beyond most analyst predictions has meant that even OPEC heavyweight Saudi Arabia was pushed into issuing emergency debt, with the nation now expected to account for 70 percent of all Gulf state borrowing this year, according to ratings agency Standard & Poor's.

A worker walks at Nahr Bin Umar oil field, Iraq, Nov. 23, 2014.
Essam Al-Sudani | Reuters
A worker walks at Nahr Bin Umar oil field, Iraq, Nov. 23, 2014.

Borrowing from oil producing nations, particularly in the Middle East and North Africa, is set to remain elevated in 2016, as many nations are still trying to catch up with the harsh side effects of the tumble in the oil price that took place in 2015, the report said.

"The more than 70 percent decline in oil prices since mid-2014 has weakened Gulf Cooperation Council (GCC) countries' public finances, resulting in government deficits for most sovereigns. The financing needs of some GCC governments are apparent, but it remains unclear in some cases exactly how the deficits will be financed, in terms of the mix between asset drawdowns and debt issuance," said S&P credit analyst, Trevor Cullinan.

S&P expects the 13 Middle East and Northern African (MENA) sovereigns it rates to borrow around $134 billion from long-term commercial sources in 2016. This compares with borrowing of $143 billion in 2015, which was more than double the $68 billion predicted.

Oil prices remain down about 70 percent from their mid-2014 highs above $100, though a steady rebound over the past two weeks has had some traders and investors wondering whether the market has reached a near-term floor. Oil prices traded higher on Tuesday, with internationally traded Brent Crude up around 0.7 percent at $36.80 per barrel.

Saudi Arabia, the largest oil producer of oil cartel OPEC, which has been pressured by other members to cut production in a bid to support prices was close to being debt-free before the precipitous fall in the commodity's price S&P said.

"The government was close to paying down all of its debt in 2015. But from July of that year, the government began a program of debt issuance, with Saudi riyal 20 billion ($5.3 billion) issued each month between August and December. We expect Saudi Arabia's debt stock to rise to 9 percent of GDP in 2016 and to about 30 percent by 2019," Cullinan said.

Global Chief Economist at HSBC, Janet Henry said risks for the Middle East and Latin America still remain firmly on the downside in 2016, even as the oil price has stabilized from record lows.

"Lower oil prices mean higher deficits, rising debt, strains to currency pegs and lower growth," she said in a note on Tuesday.

"We expect the pegs to remain intact, but with lower fiscal revenues, spending will have to be cut dramatically and subsidies on fuel reduced. We expect growth in the MENA region to be 1.9 percent in 2016, down from 2.9 percent in 2015," Henry added.