After issuing record debt in 2020, Gulf countries will likely borrow less this year

Key Points
  • Gulf states will not need to borrow as much as they did last year because their fiscal positions are likely to improve as oil prices and the economy recover, analysts said.
  • "We broadly expect fiscal consolidation over 2021 to 2023 — we think the deficits will be smaller, [and] economic activity will be stronger," said Trevor Cullinan of S&P Global Ratings.
  • The need for borrowing remains, however, and countries in the region will continue to issue bonds in 2021.
Men walk past a closed restaurant in the Saudi capital Riyadh, on February 5, 2021.
Fayez Nureldine | AFP | Getty Images

Gulf nations issued a record amount of debt last year but will not have to borrow as much in 2021, according to analysts who spoke to CNBC.

That's because the fiscal positions for countries in the Gulf Cooperation Council, or GCC, have likely improved thanks to a recovery in oil prices and as the regional economy bounces back from the pandemic's fallout, they said.

"2020 was an exceptional year," Trevor Cullinan, lead analyst of GCC sovereign ratings at S&P Global Ratings, told CNBC in February.

"Going forward, we don't think that there will be the same need as in 2020," he said. "We broadly expect fiscal consolidation over 2021 to 2023 — we think the deficits will be smaller, (and) economic activity will be stronger."

Record levels of debt issued

Bond issuances by Gulf countries rose significantly in 2020.

According to data from Capital Economics, the total international debt issued by Saudi Arabia, the United Arab Emirates, Qatar, Bahrain and Oman was $42.1 billion last year. That's up 25% from $33.5 billion in 2019.

"The amount reached a record high, driven by higher deficit financing needs resulting from the slump in oil prices and the impact of Covid-19," said Scott Livermore, chief economist of Oxford Economics Middle East.

But oil prices have been climbing up due to a harsh winter in the U.S. as well as an improving global economic outlook.

Those factors provide a "welcome reprieve" to Gulf budgets, said Livermore.

Benefits of turning to the bond market

Still, the need for borrowing remains, and countries in the region will continue to issue bonds in 2021.

Saudi Arabia has already raised $5 billion this year, and reportedly hired banks in preparation for a euro-denominated bond sale.

"Governments in the Gulf are still likely to favor international bond issuance over other forms of financing for the time being," according to James Swanston, a Middle East and North Africa economist at Capital Economics.

He said that dollar revenue can plug both the budget deficit and current account shortfall, and help the government better defend their dollar pegs without tapping on foreign exchange reserves.

Leaning on international markets also means local banks don't have to buy up sovereign bonds, he said.

Livermore pointed out that borrowing costs are low, and governments in the region can issue bonds to fund diversification programs.

"Countries may also choose to come to (the) market to refinance maturing debt if sentiment remains favorable," he added.

Effects of taking on debt

Sovereign debt levels in the Gulf are relatively low, said Livermore.

"If the rollover risk is effectively managed through refinancing, then GCC governments should be able to navigate through the short term," he said.

Capital's Swanston agreed that higher debt-to-GDP ratios in the region generally do not pose a "major risk," though he is concerned about Oman and Bahrain. Debt-to-GDP ratio is a measure of a country's ability to pay back public debt — a high ratio may be an indication that a country could find it harder to pay off its external debts.

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Government debt ratios in the two countries have "risen sharply" in recent years, Swanston said.

Both states have tightened fiscal policy to address public finances, he added. "But, some period of prolonged austerity will be needed to keep deficits and the public debt in check."

Bahrain's government debt-to-GDP ratio is expected to hit 115% this year, while Oman's is predicted to reach 84%, according to data from S&P Global Ratings.

— CNBC's Thomas Franck and Eustance Huang contributed to this report.