Amid Military Threats All Around, GCC Members Face Economic SqueezeMark Melin
Yesterday, the UAE accused Qatari jets of intercepting a commercial jet bound for Bahrain. Qatar denied the charges, but whether true or not, the event is a reminder of the possibility of a purposeful or accidental war among GCC members could break out at any time. In addition, any war could involve outside powers including Turkey, Iran and possibly the US and Russia. However, add in economic woes and the picture grows more dire.
2017 turned out to be a bumper year for debt issuance among GCC members. According to a report issued by credit rating agency Standard and Poor's in November last year, during the first ten months of 2017 corporate and infrastructure capital market issuance within the GCC was already running at double the rate of the previous year.
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Through the first nine months of 2017, Islamic bond (Sukuk) issuance increased to $6.8 billion, up from $2.8 billion during the same period of 2016. Sukuk issuance came to more than half the total of all corporate and infrastructure debt of $12 billion for the 2017’s first three quarters.
This growth in borrowing comes as the GCC states try to spend themselves out of an economic slump, while at the same time trying to deal with lower oil prices. S&P Global Ratings estimates that GCC members faces infrastructure project spending requirements of around $120 billion to $150 billion annually between now and 2019.
The outlook for the region isn't a clear as it once was thanks to political instability and economic headwinds caused in part by states' efforts to try and reduce the region's dependence on oil revenues. The report from S&P picks out the introduction of a value-added tax across the GCC starting in 2018 as another headwind that could further dampen activity in the years ahead.
Value-Added Tax Will Hold Back GCC members ' Growth In 2018
Moody's agrees with this view. In a report issued earlier this week S&P's ratings peer noted that even though oil prices have risen "significantly from their trough" most sovereigns in the region will "continue to run sizable fiscal deficits and record an increase in their debt burdens." To add to the uncertainty, "long-standing geopolitical event risks have come to the fore again and will play an important role in defining sovereign credit quality in 2018."
What's more, Moody's believes that the GCC will not benefit from the rest of the world's "healthy global growth" during 2018 because non-oil sectors represent such a small part of these countries' economies. In fact, Moody's expects the whole region to grow at a below average rate of 2% for 2018, that's less than half the rate of 5% per year recorded between 2010 and 2015.
"We forecast a slight pick-up in GDP growth of close to 2% in 2018 for the GCC as a whole. While this will mark an improvement from 2017 (0%), aggregate growth will remain well below the average 5% per year that had been recorded between 2010 and 2015 given flat production in the hydrocarbon sector and slow recovery in non-oil growth."
Meanwhile, it's likely that the introduction of the new value-added tax and reduction of subsidies will curtain consumer spending:
"Growth performance in most GCC countries has been driven by domestic demand over the past few years, and has largely been linked, both directly and indirectly, to fiscal spending. While we believe that the pace of fiscal consolidation will likely slow somewhat, we see very limited potential for a rapid recovery in government consumption and public investment. Moreover, we expect that private consumption will be negatively affected by the introduction of the value-added tax (VAT) in some countries from early 2018."
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