Gulf to continue leaning on debt markets

Dollar bond issuance in the Gulf has got off to a quick start this year with Saudi Arabia, Oman, and Bahrain selling a total of $10.25bn of bonds in the past month. If oil prices continue to rise, as we expect, budget deficits will narrow and reduce governments’ financing needs. But we think that policymakers will continue to lean on international bond issuance to plug remaining shortfalls. For one thing, the dollar receipts can be used to plug both budget and current account deficits, helping to defend of dollar pegs without needing to reduce FX reserves. And it allows governments to avoid leaning on local banks to absorb sovereign debt, reducing the risk of crowding out lending to the private sector. Public debt-to-GDP ratios will rise but, aside from Bahrain and Oman, this is not a major cause for concern.