A deflated oil price has left the Gulf sovereigns with a $270billion funding gap, according to Standard and Poor’s latest report.
S&P predicted a $270billion gap between capital spending for projects by Gulf sovereigns and contracts awarded until 2019, and a deficit of $50billion for infrastructure project contracts.
Gulf infrastructure projects need a combined $600billion in funding.
However, S&P’s report stated: “Falling revenues from commodity exports and a reduction in growth in deposits at banks in the Gulf will constrain the amount of funding available to support the region’s substantial infrastructure bill in the coming years.”
“The drop in commodity resilience will force the region to be more ‘creative’ in its funding methods.
“Given the large need for infrastructure funding, we think governments may choose to either borrow more directly or through the GREs, or turn to more financially innovative solutions such as public private partnerships,” the report read.
“In our view, Gulf governments are protecting capital spending as a share of overall expenditure to support growth and further their diversification strategies.
“The countries with the most significant investments over the period will be Saudi Arabia, the United Arab Emirates, Kuwait, and Qatar, which combined represent around 92% of total capital spending across the Gulf Cooperation Council (GCC) member countries, which also include Bahrain and Oman.”
The market conditions are forcing sovereigns to cut budgets.
The report read: “Saudi Arabia, for example, reduced its 2016 transport and infrastructure budget by 63% from the previous year. This for us illustrates the challenge Gulf countries will face to pay for infrastructure through traditional sources, including government funding.
“Spending on transport and infrastructure will fall 63 per cent in 2016, as the kingdom axes capital expenditures in a bid to trim next year’s deficit.
“Funds for projects, such as the Riyadh Metro and Jeddah’s King Abdulaziz International Airport, fall to 23 billion Saudi riyals in 2016, down from 63bn riyals this year.”
Governments are now tapping into their assets and borrowing more to finance their fiscal deficits.
“We see domestic debt issuance to fund infrastructure projects as part of a larger goal for Gulf sovereigns wanting to diversify funding sources, build debt capital markets, and slow the reduction of their asset positions in the light of sizable fiscal deficits,” the report read.
“To this end, Saudi Arabia started issuing domestic debt again last year. Indeed, throughout the Gulf, sovereign issuance increased to $53billion in 2015 from just $14billion in 2014, despite steady bank issuance and a halving of corporate and infrastructure issuance over the same period. This increase drove the overall increase in the region’s capital market issuance across all sectors to $76billion last year from $45billion in 2014.
“This is sending a signal that the government is willing to embrace private finance and to allow it to play a bigger role in footing the infrastructure bill–which would represent a large shift in infrastructure finance in the Gulf. We believe that a shift toward private-sector funding by governments could signal an acceptance of more innovative financing techniques involving both public and private finance of national infrastructure.”
The move will force the price of bank funding to rise.
The report added: “Overall bank liquidity in the Gulf region started to weaken visibly in the second half of 2015, and we expect a similar trend this year. Gulf banks traditionally generate the bulk of their funding from locally raised deposits, and GREs are important depositors in these markets. Given lower energy prices, we have seen erosion in this segment, which triggered a slowdown in the growth of local deposit markets in 2015, particularly in the UAE and Qatar. Although Gulf banks operate with healthy liquidity pools, given the slowdown in deposit generation, the amount available to them is gradually eroding.”
Finally, the financial pinch will force the region to more aggressively chase renewable solutions, according to the report.
“We think that the oil price decline, combined with declining subsidies for fuel in the Gulf, could strengthen the project finance and PPP markets for energy projects, and spark greater interest in renewable energy projects, which are still at a nascent stage in the region,” it said.
“Historically, subsidized fuel prices in the Gulf have put renewable projects–be it wind or solar among others–at an economic disadvantage compared with projects for fossil fuel plants. However, lower government revenues stemming from falling commodity prices have prompted governments to tackle energy subsidy reform. Saudi Arabia, Oman, Qatar, and Bahrain have all recently raised the price of gas supplied to downstream industries. Any reduction in energy subsidies to the power sector resulting in more cost-reflective tariffs could improve the market for renewable financing, in our view.”
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