Sustained fiscal weakness will damage the long-term growth outlook in the region, but the near-term implications are becoming increasingly visible through tighter domestic liquidity conditions, according to a report from ICAEW and Oxford Economics.
Stock markets in GCC countries fell by between 15% and 25% last year and some fell a further 10% to 15% in January 2016; aggregate growth in broad money (used as a general estimate of the supply of money in an economy) had slowed to just 1% y/y in November and was negative in some countries; market interest rates have started to edge up from previous lows amid higher official rates following the US Fed’s decision to hike rates in December; and finally, there has been a draw down in government reserves with funds needed to cover emerging fiscal gaps.
The latter has also had the effect of depriving local banks of funds placed at low cost or even free, putting additional pressure on bank margins at a time when demand for borrowing has also weakened. Meanwhile, to alleviate some of the pressure on domestic liquidity and to provide additional policy space, the Saudi Government has mooted the issue of international bonds in 2016 to accompany the issue of domestic bonds started last July.
Existing debt levels are extremely low at an estimated 7% of GDP in 2015 and – despite a downgrade by Standard and Poor’s in October – its debt rating remains towards the upper end of investment grade.
“We see Saudi government debt levels rising to around 30% of GDP by the end of this decade and, although no firm announcements have yet been made, other countries in the region are likely to follow suit,” said the report. the next year.
Source: ICAEW and Oxford Economics.
