There will be a slight pick-up in GDP growth of close to 2% in 2018 for the GCC as a whole, said Moody’s Investors Service in a report. While this will mark an improvement from GDP stagnation in 2017, aggregate growth will remain well below the average 5% per year seen between 2010 and 2015, given flat production in the hydrocarbon sector and a slow recovery in non-oil growth.
According to the report, the 2018 outlook for sovereign ratings in the GCC is negative, reflecting GCC members’ muted economic growth, structural challenges and geopolitical tensions in the region. Three of the six GCC sovereigns hold negative rating outlooks, while the remaining three have stable outlooks, pointing to the likelihood of fewer downward rating adjustments in 2018 compared to 2017.
“Although oil prices have risen significantly from their lows in early 2016, most sovereigns in the region will continue to run sizeable fiscal deficits and record an increase in their debt burdens over the next 12 to 18 months,” said Mr Steffen Dyck, a Moody’s Vice President – Senior Credit Officer and the report’s author. “In addition, longstanding geopolitical event risks have come to the fore again and will play an important role in defining sovereign credit quality in 2018.”
If oil prices stabilise at their current levels, the pace of proactive fiscal consolidation could be slowed because government revenues will be bolstered, said the report.
While rising oil prices and fiscal consolidation measures have helped to narrow GCC fiscal deficits from their peaks in 2015 and 2016, the region as a whole will continue to record lower revenues than spending. On an aggregate basis, the GCC will exhibit an average fiscal deficit of 5% of regional GDP this year and next. This will contribute to a rise in debt levels and a reduction in fiscal reserves for most sovereigns in 2018.
GCC government debt burdens will continue to rise, but at varying speeds. Bahrain’s government debt is expected to approach 100% of GDP by 2019, while further increases in the debt burdens of Kuwait and Saudi Arabia will be at much lower levels. Meanwhile, Qatar and, at a much lower level, the UAE, will see their debt loads stabilise in 2018 and 2019.
Regional geopolitical tensions intensified in 2017, as shown by the standoff between Qatar and three of its GCC neighbours. Moody’s expects the diplomatic and economic boycott of Qatar by Saudi Arabia, the UAE and Bahrain to extend well into 2018 and possibly beyond.
The longstanding regional rivalry between Saudi Arabia and Iran could escalate further, including through the worsening proxy conflict in Yemen, said the ratings agency. This rise in regional geopolitical tensions is credit-negative for the region as a whole given the potential impact on investor confidence, and therefore also on growth and external financing costs. This is particularly relevant for sovereigns such as Bahrain and Oman whose greater reliance on external finance implies more direct exposure to a confidence shock. M