Pandemic drives Gulf governments to debt markets

Foreign currency bonds worth about $40bn have been issued so far this year, with more to come as Gulf governments try to bridge large budget deficits

This year has seen a new record set for debt issuance by GCC countries, with low oil revenues and the costs associated with Covid-19 lockdowns causing budget deficits to soar and pushing governments towards international debt markets.

According to London-based Capital Economics, about $40bn-worth of foreign currency-denominated sovereign bonds have been issued so far in 2020. This figure almost doubles with the addition of local currency issuance.

The previous record for international bonds was set in 2017, when $37.7bn-worth of debt was issued.

The Covid-19 crisis is a key reason for the high volume of bonds being sold, according to analysts.

“The amount of debt issued is very likely above and beyond what the authorities in the GCC may have otherwise issued,” says Middle East and North Africa economist at Capital Economics, James Swanston.

“Against the backdrop of low oil prices, which has caused budget deficits to widen, there is limited scope to row back on austerity. Turning to debt markets makes the financing of these large deficits easier.”

Distribution of debt

The debt is unevenly distributed, however. Kuwait has been unable to issue any bonds due to the failure of its National Assembly to pass a new debt law.

At the other end of the scale, Saudi Arabia has been a very active market participant. According to Riyadh-based Jadwa Investment, total debt issuance and refinancing by the Saudi government for 2020 is likely to reach SR220bn ($58.7bn).

Oman and Bahrain have also had to cope with big budget deficits and have responded by turning to the debt markets. On the other hand, the UAE has faced more limited additional financing requirements this year.

The year is not over yet though, and there is more debt issuance to come.

In mid-October, Oman launched a roadshow for a dual-tranche $2bn conventional bond issue, which could be followed by a dollar-denominated sukuk before the end of the year. Standard & Poor’s (S&P) says it expects Muscat to raise about $5.5bn from international capital markets before the turn of the year.

Kuwait debt law

The overall figure for this year would have been even higher if the Kuwait government had been able to issue debt. However, it remains hamstrung by opposition in the National Assembly to proposals to issue up to KD20bn-worth ($65bn) of debt.

Parliamentary elections are scheduled for December and analysts on the ground say the authorities may use the opportunity to pass the new debt law by decree in the period before the new parliament is formed.

Kuwait was downgraded by Moody’s Investors Service in late September, but still maintains a healthy credit rating of A1. The same cannot be said for Bahrain and Oman, which are both classified as junk issuers by the main ratings agencies.

Oman has suffered four downgrades this year – two from Fitch Ratings in March and August, one by Moody’s in June and one by S&P in October. Bahrain was also downgraded by Fitch in August.

Each downgrade carries the risk of higher debt repayment costs and Muscat and Manama could soon find it unappealing to borrow on international markets.

Government fiscal balances

“Sovereign dollar bond yields remain elevated and any future downgrades could push them up higher, to around the 8 per cent mark, where we tend to see emerging market [governments] shy away from further external borrowing,” says Swanston.

Instead, Bahrain and Oman may have to turn to a combination of domestic borrowing and tapping their richer neighbours for additional lines of credit – something they have both done in the past decade.

Other GCC governments do not face such problems, but, with oil prices expected to stay low next year, almost all of them will need to issue more debt to cover their budget deficits. Moody’s says Kuwait is likely to need to issue up to $90bn to cover its funding requirements until March 2024.


Existing borrowings will also need to be refinanced. According to S&P, Oman faces debt repayments of $4.3bn in 2021 and $6.4bn in 2022. Bahrain has $5.6bn-worth of external debt maturing in 2021-23, according to Fitch, which says Bahrain will need to issue $2bn-2.5bn a year going forwards.

Other governments are better placed to cope with the fiscal challenges they face, at least in the short term.

Saudi Arabia, for example, may try to limit its debt issuance and instead avail itself of high dividend payments from Saudi Aramco – something that could help to keep its deficit at about 12 per cent of GDP, according to Moody’s. Much of this will have to be funded from the national oil company’s cash reserves.

“Leveraging Saudi Aramco’s extraordinary financial flexibility to pay large dividends to the state will partly offset the drop in government revenue because of lower oil prices,” says senior analyst at Moody’s, Alexander Perjessy.

“However, the government is unlikely to be able to repeat the same manoeuvre beyond 2021, particularly when taking into account Saudi Aramco’s own capital expenditure needs.”

22 November, 2020 | .By DOMINIC DUDLEY