Large sovereign issuance expected from GCC
BofA Merrill Lynch expects Saudi Arabia, Argentina, Kuwait and Indonesia to be the largest issuers in 2017. These four issuers could account for 32 per cent of the total sovereign gross issuance.
BofA Merrill Lynch expects 2017 issuance to continue to be high. Among those, Kuwait inaugurated the external sovereign debt market with $8 billion to finance a budget deficit resulting from low oil prices. The expected 2017 sovereign issuance is quite distributed among GCC, EEMEA and LatAm.
The speech from the Saudi energy minister suggested that Saudi Arabia was surprised at the rapid production increase from shale. In regard to compliance, Saudi Arabia warned that it will not cut more than its target indefinitely. In fact, it reported that it increased production in February, although it highlighted that this was due to increase in stocks as supply was kept stable. Saudi Arabia signalled it was open to renewing the OPEC/non-OPEC deal in May.
A goal of reduction in the excess oil inventory toward the five-year average may be consistent with market intervention through 2017. Key will be US inventory correction as OPEC cannot set itself up for a course of permanently lower market share. The budget statement and medium-term programme imply three Saudi policy priorities: easing near-term austerity, supporting higher oil prices and introducing non-oil revenue reforms.
The 2017 budget suggests flattish real spending, along with further repayment of government arrears in 1Q17. BofA Merrill Lynch sees the budget being consistent with oil prices of $55/bbl ($65/bbl target, $40/bbl floor) and a fiscal breakeven of $98/bbl.
BofA Merrill Lynch expects the 2017 fiscal deficit to narrow on the back of higher oil prices, discipline in spending and non-oil revenue measures. BofA Merrill Lynch sees the 2017 budget deficit at SAR316 billion ($85 billion; 12 per cent of GDP) on the back of higher oil prices ($57/bbl), compared with a deficit of SAR402 billion in 2016 ($107.5 billion; 16.9 per cent of GDP) and SAR385 billion in 2015 ($102 billion; 15.9 per cent of GDP).
Underlying spending discipline kept the 2016 fiscal deficit in line with budget targets. However, the repayment of contractor arrears (SAR 80 billion; $21 billion) and spending related to surplus projects (SAR 25 billion; $6.7 billion) drove the 2016 fiscal deficit wider.
The authorities are planning the introduction of means-tested cash allowances in 1Q17, with disbursements from June for a total budget cost this year of SAR 25 billion or 1 per cent of GDP. This is likely to allow further selective energy subsidy reform in 2H17 (including electricity, gasoline and diesel). Excise taxes on tobacco and sugary drinks are likely to be introduced in 2Q17, and an expat levy will come into force in July 2017.
Bahrain has tapped its existing 2028 international bond at a modest concession to the curve. Recent data suggests that imbalances remain elevated.
FX reserves dropped by $170 million between June and November 2016 to $2.6 billion, despite the issuance of $2 billion in international bonds in October 2016. This suggests that external headwinds remain.
The government has highlighted that it is implementing measures that could yield fiscal savings of circa $1.1 billion annually (circa 3 per cent of GDP), but given the wide starting budget deficit position, we think government debt is unlikely to stabilise in the absence of reforms and increases in oil prices.
BofA Merrill Lynch remains Marketweight on external debt to balance potential implicit Saudi support with existing large imbalances.