The low oil price is starting to bite among oil economies, and it couldn’t be happening at a worse time. As our feature in this edition explains, the need for capital raising in the debt markets – first at the sovereign level, then the government-related entities, then the banks, then the companies – are rising dramatically at exactly the same time that local liquidity is drying up.
For a closer look at the problem in detail, consider Oman. As Euromoney went to press, the country was in the market with a sukuk in Omani rials: an easy deal to get away, surely, for this wealthy and low-debt economy.
Well, this time, probably; but when you look at the Moody’s ratings rationale (A1, with a negative outlook on the government’s ratings) the language doesn’t sound like what we’re used to from peerlessly wealthy emirates and monarchies. Growth slowing to 2%-3% a year until 2019; a likely sharp fall in nominal GDP; crimped government and private sector incomes; reduced government revenues; higher sovereign debt; uncertainty over the effectiveness of the government’s policy response. Sounds like the UK.
Most of the Gulf states are protected by their low levels of government debt and, in many cases, their hoards of sovereign wealth, accumulated for a day such as this. But even so, if oil prices stay at this level for a few years, the strain is really going to show. As one banker tells Euromoney: “In countries where debt-to-GDP has been 25%, if oil revenues are halved that very quickly becomes 50%.”
Oil-rich sovereigns are not going to have a problem raising funds from the international debt markets, even if (or even because) they haven’t been active issuers for years. They might have to pay up a bit more than in the good times, but they will find a willing audience.
The problem, instead, may appear at the bank level. Today, most Gulf banks are well capitalized. But they are also in a narrowing vice: deposits, particularly government deposits, are being withdrawn because the state needs them; cosy bilateral lending relationships are under strain as everyone re-evaluates what to do with their own liquidity; bank regulation is keeping the requirements for heavy financing buffers high; and there are a lot more bank issuers in the markets than there are sovereigns, making for a more crowded market for issuers just as the buyer base seems to be falling away.
A failed bond issue for Abu Dhabi Commercial Bank may have been more about timing and tenor than the death of liquidity, but if another deal or two goes the same way, we really will have moved into a troublingly tight new environment.