Gulf countries look to international investors for financing

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The wealthier oil exporters had become used to consistently high oil revenue for most of the last decade, funding vast infrastructure investment programmes. However, they are now looking for new means of financing, as it has become increasingly accepted that lower oil prices are here to stay. This will continue to be a focus in 2017 and beyond as even if prices improve slightly on 2016 (around $50-60 is widely viewed as a likely level during the next few years), most countries will still be facing fiscal deficits.

The first step was to tap the international bond markets, so as not to crowd out private sector borrowers domestically, as local banks are already being stretched by reduced oil revenue deposits. (Saudi deposits returned to y/y growth in March 2017, after having been in decline for most of the previous year – the first declines since 1995.) While some countries, notably Qatar, had a track record of issuance even during the boom times, others had long steered clear of the debt markets.

October 2016 saw the first issuance by Saudi Arabia, an emerging market record of US$17.5bn, and Kuwait followed with its own $8bn debut in March 2017. $45bn in sovereign bonds were issued in the GCC in 2016, nearly quadruple the level in 2015, with a further $18bn in Q1-2017.

Another major Saudi issuance is expected later this year and most others are also likely to return to the market. Qatar, however, has said that it might not need to go to markets if oil prices remain close to its fiscal breakeven level (which the IMF projects is $53).

Another source of financing is through asset sales, whether securities held by sovereign wealth funds or the part-privatisation of state-owned companies. There was initially some scepticism about Saudi plans to IPO Aramco, but serious moves have been made towards a 2018 dual listing on the Tadawul plus a major global exchange, including hiring advisors and cutting its tax rate from 85% to 50%, which significantly boosts its potential market value.

Many other privatisations are planned in Saudi, from flour mills to electricity, and this could add impetus to long-standing plans to sell off stakes in state-owned firms in Oman, Bahrain and Kuwait.

Now that Gulf governments have less capacity to finance infrastructure projects, significant steps have been made towards developing PPPs. Qatar is expected to finalise a PPP law by the summer, similar to ones enacted recently by Dubai and Kuwait, and Oman is also drafting one. Saudi Arabia lacks a formal legal structure, but is already moving ahead with PPP tenders, including one signed in March to build a new terminal at Yanbu airport, and its new National Centre for Privatisation will accelerate the trend. Meanwhile, Kuwait is tendering wastewater plants and Qatar is considering a PPP model for one of its World Cup stadiums.

The flurry of activity in debt markets, privatisation and PPPs has only just got started and should generate interesting business opportunities in the next few years and help to partially rebalance the roles of the state and private sector in the GCC.

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Richard Boxshall

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