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Arab states face massive deficit, debt crunch: HSBC

Persian Gulf Arab states face an account deficit of $395 billion over the next two years.

Arab states in the Persian Gulf are facing a massive account deficit and a hard time to refinance $94 billion of debt in the next two years, HSBC Holdings Plc says. 

Oil-rich GCC states have been seriously hit by the collapse in crude, prompting unprecedented measures to avoid a breakdown of their financial system. Some of them, such as Saudi Arabia, have been burning through reserves at an alarming pace.

According to Europe's biggest banking and financial services company, the Persian Gulf Cooperation Council countries face a fiscal and current account deficit of $395 billion over the next two years.

They also have to refinance $52 billion of bonds and $42 billion of syndicated loans, mostly in the UAE and Qatar over the period, HSBC said.

Expectations that these debts "will be part-financed through the sale of sovereign US dollar debt will complicate efforts to refinance existing paper," HSBC’s chief economist for the Middle East Simon Williams said.

With the Persian Gulf acting as a single credit market, “the refinancing challenge will likely be much more broadly felt" and "compounded by tightening regional liquidity, rising rates and recent downgrades," he told Bloomberg.

Last November, Standard & Poor's downgraded its assessment of Saudi Arabia’s sovereign debt, prompting an angry reaction from the kingdom.

Saudi FM Adel al-Jubeir (R) addresses a GCC meeting in Doha in Dec. 2015 as the council's chairman Abdullatif bin Rashid Al Zayani looks on.

The US financial services company cut its rating by one notch, citing a “pronounced negative swing” in Saudi finances including a widening budget deficit as it held the possibility of a further downgrade.

The cut has raised the borrowing costs of the country. Saudi rulers have already borrowed $4 billion from local banks and plan to raise as much as $26 billion in bonds before the end of the year. They have also withdrawn as much as $90 billion of assets held abroad.

According to the International Monetary Fund (IMF), Saudi Arabia’s fiscal deficit could rise to around $140 billion or 20% of GDP, with spending forecast to reach more than $270 billion this year.

Billions of dollars have been drained from the region’s banking system as oil prices have plunged to the lowest levels in 12 years.

HSBC said Persian Gulf countries have about $610 billion outstanding in foreign currency-denominated bonds and syndicated loans. This includes financial and corporate debt, as well as sovereign debt, mainly in the UAE, Bahrain and Qatar.

Almost half of the maturities due in the next two years are in the banking sector, HSBC said. This means any increase in costs at refinancing could quickly feed through into a broader monetary tightening, it added.


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