Gulf nations turn to borrowing to handle deficits

Under the pressure of historically low oil prices, Gulf countries are turning to the bond market and borrowing to keep deficits under control.

A Morningstar report, and other financial releases, shows the extent of borrowing by countries such as Oman, Saudi Arabia and Qatar as officials in those countries weigh the long-term impact of cheaper oil. Morningstar cites bond issues of over $9 billion by Qatar, while Gulf Business shows Oman seeking $2.6 billion in foreign investment.

To some extent, experts say, the nations have done well by starting to diversify their economies away from oil and by avoiding the tapping of sovereign wealth funds to shore up their finances. But there’s still the question of how the borrowing will impact their economies over the long term. Then there’s the bond buyer, a choosy patron who is asked to invest in the long-term solvency of struggling nations.

“Right now is an unbelievable time.” Gary Patterson, who runs the FiscalDoctor consulting business, recently told the Gulf News Journal.

Patterson said there is a need to look at bonds from both angles: that of the issuer, and that of the buyer. He cited the kinds of long-term loans being offered by countries like Germany and Switzerland, some of which have negative interest rates, and the debts of countries like Venezuela, which approach junk bond status. Venezuela, he said, might need oil at $100 a barrel, in which case, the current prices leave an extremely high deficit that makes for a bumpy ride.

As to why investors would buy the extremely low-interest bonds issued by some of the central European countries, Patterson called the trend “a typical flight to quality.”

“There are times when people want to get a return on their money,” Patterson said, “And there are times when they want to get a return of their money.”

What bond buyers need to address, Patterson said, is what sort of oil price a bond-issuing economy needs going forward in order to break even. That, he said, can help bond buyers address risk, for example, on a scale of 1 to 10.

A Quora article on oil breakevens shows multiple perspectives on Saudi debt, with some suggesting the nation would need $100 a barrel, and others putting the long-term breakeven much lower at around $60 a barrel.
These types of investments, Patterson said, require this sort of due diligence in order to support reasonable plays on international debt.

“This is a long-term investment.” Patterson said, contrasting long-term bonds with some types of relatively low-risk certificates of deposit.

Patterson said FiscalDoctor encourages businesses to think in the same way about risk that a bond buyer would when wading into, for example, Gulf Cooperation Council debt.

“What area of your business are you avoiding in terms of looking at your risk?” Patterson said, suggesting a business should also rate its risk on a scale in order to be transparent about its real liabilities and projections moving forward.

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