US-based association for the global financial services industry, Institute of International Finance (IIF) stated that capital inflows into the region are expected to remain high, despite the impact of COVID on regional economies.
Garbis Iradian, Chief Economist, Middle East and North Africa of the IIF said, “We expect non-resident capital inflows to the region to edge up to $177 billion in 2021, equivalent to 6.6 percent of GDP”.
The issuing of GCC hard currency bonds plays a major role in sustaining high capital flows into the country. Despite the high demand for GCC bonds among high quality emerging market investors, increasing funding requirements are keeping the issuance high.
Strong demand for GCC bonds
So far this year, Saudi Arabia, the UAE, Qatar, Bahrain, and Oman have sold $91 billion in hard currency bonds, compared to $99 billion for the whole year of 2019. While spreads have narrowed in recent months, but they are wider than before the pre-COVID level.
The IIF projects the gross public external financing needs of the region at about $100 billion in 2021. It will be largely driven by the six GCC countries.
Samuel LaRussa, Senior Research Analyst said, “Strong demand for high-quality assets from the region will remain at least for the next few years given the large financial buffers in the form of official reserves and SWFs (particularly in the UAE, Qatar, Kuwait, and Saudi Arabia) and the resumption of fiscal adjustment”.
Solid returns, dollar-pegged currencies and large financial buffers in Saudi Arabia, the UAE, Qatar, and Kuwait make debt an attractive substitute to riskier securities in other EMs. In these countries, the underlying technical factors supporting credit, such as incremental yield, better credit rating and large public foreign reserves, still hold up.
Issuance to remain high
Overall, the funding needs of the GCC in 2021 are expected to remain strong amid narrower fiscal deficits. The debt servicing and amortization requirements, however, would see further external financing through bond issuance.
The IIF expects that, with oil prices set to remain below $50 billion for the near future, serious fiscal reform steps are being undertaken by GCC authorities to place their finances on a more sustainable footing.
Mr. Iradian said, “Even so, fiscal and current account deficits are likely to decline only gradually, and the GCC countries may continue to rely on substantial foreign borrowing in the years ahead”.
Low FDI inflows
Foreign direct investment (FDI) remains subdued and mainly concentrated in the oil and gas industries in the MENA region. In 2021, FDI inflows into the MENA region are anticipated to remain relatively modest at approximately 1 percent of aggregate GDP. The UAE and Egypt remain the region’s highest FDI recipients. While combining both the region it will be more than half of the total.