A recent report by HSBC into external debt levels in the Arabian Gulf region makes for sobering reading. As this newspaper reported this week, the bank has crunched the numbers on aggregate debts owed by governments, financials and corporates, and come up with some worrying figures.
GCC states owe a total of US$610 billion in forex bonds and syndicated loans, to be repaid over the next decade; about $94bn has to be repaid or refinanced this year and next; thereafter, until 2020, maturities hover ominously between $60bn and $70bn per year.
In absolute terms, most of that debt – about $300bn over the next 10 years – is concentrated in the UAE, although Qatar also has a sizeable chunk; and measured against GDP, Bahrain’s debt is the biggest – about 80 per cent of annual GDP.
Banks, energy firms and governments are the main debtors. Regional governments own most of the energy companies, and are therefore liable for their debts – they are also major shareholders in the banks, which, in any case, they would never allow to go under. That all adds up to a big sovereign headache.
In normal times, those levels of debt would not be a problem. But with oil at $35 per barrel, they suddenly become a significant issue.
They either have to be repaid on time, or restructured.
Cash-strapped sovereigns might not have the wherewithal to do the former, but will find their options on the latter more limited than ever.
Conscious that the ratings agencies have been on a downgrading purge in the region, creditors will charge more and impose tougher terms on refinancings. Issues of new debt, which could tide sovereign debtors over the immediate repayment spike, will be more difficult.
And, note, this is foreign denominated debt. It is mainly in US dollars, and has to be repaid in the same.
That means there will be an increasing scramble for greenbacks in the region. Some banks are already reporting a liquidity squeeze for the US currency, despite the dollar peg to most regional currencies.
Is this 2008 all over again? In one important aspect, the present position is worse. Seven years ago, oil was roughly double where it is now and was just starting its climb up to $140 per barrel.
On the other hand, there is no global financial credit crunch now, as there was then; and – perhaps most importantly for the UAE – there does not now seem to be a problem like Dubai World on the horizon.
It was that $25bn “standstill” in November 2009 that sparked the real debt crisis that was solved only by federal intervention.
Could there be a Dubai World-type “black swan” lurking out there now? Well, most Dubai entities have successfully restructured their liabilities so there does not seem to be an obvious candidate.
But it’s in the nature of black swans that you don’t see them until they’re upon you – and with numbers of the magnitude revealed by the HSBC report, there is a lot of cover in which they might be hiding.
How much was learnt by policymakers from the 2008 crisis? We are about to find out.
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