As oil prices continue to sit at historically low levels, many oil-rich Gulf states are looking at ways in which they can address these new constrained times. In June 2014, Brent Crude oil sold for around $115, but in recent months has hovered near to $45. As a result, many oil-rich Gulf states have seen their economies face serious difficulties.
In order to get out of this situation, some have begun issuing government bonds on the international markets.
Rebalancing the economy
Writing in
Gulf News, Nasser Saidi, former vice-Governor of the Bank of Lebanon, said that such bond issuances were needed to rebalance the economies of Gulf states. He said: “The Gulf Cooperation Council (GCC) countries should issue debt and sukuk (Sharia-compliant bonds) to finance budget deficits as well as development projects and infrastructure investment.”
He added: “Economic diversification – so long preached rather than implemented – is now a necessity for the Gulf’s oil states. As the cliché has it, necessity is the mother of invention. The GCC should embrace it.”
Gulf News article
Bonds for sale
Saudi Arabia appears to be following the advice to diversify, according to a
Bloomberg report by Grant Smith and Wael Mahdi, which says that it may sell bonds on the international market worth as much as $15bn.
$300bn
The amount oil revenues will fall for Gulf states this year, according to the IMF
In an interview with
Bloomberg TV on Wednesday, Fahd Iqbal, Head of Research in the Middle East at Credit Suisse Group AG, said: “The Government has talked about raising its debt-to-GDP ratio from basically near zero levels now – it must be 5 or 6% now – to 50% in the space of about five years.
Iqbal believes that the bond issuance would merely be a first step towards achieving this 50% debt-to-GDP figure, but if achieved within five years would represent $350bn.
Bloomberg article
Filling the fiscal gap
A former official in Saudi Arabia’s Ministry of Finance, John Sfakianakis, told
CNN Money: “There is a need to fill the fiscal gap”. He added, “It's better for this money to come from other sources than reserve assets because as they get depleted that places a bigger risk over the medium to long term.”
Similar moves to issue bonds have been seen other Gulf states in recent months. Sfakianakis believes Saudi Arabia will “easily” raise $15bn through its bond sale, especially as Qatar’s recent issuance was “heavily oversubscribed”.
However, others feel that Saudi’s recent economic woes would deter many investors. Michael Block, chief strategist at Rhino Trading Partners, was quoted by CNN Money: “Let me give my check book and feed it to the dog,” in reference to the bond sale.
CNN Money article