How are GCC Nations financing the Stimulus Packages?

UAE News:
The Government of Dubai issued a Sukuk for the first time in four years: the AED 1bn (USD 272mn) eight-year Sukuk at 4.7125% is in the form of a private placement and has been sold to the emirate’s banks.
Dubai non-oil sector PMI fell to the lowest-ever reading of 45.5 in March (February: 50.1), with the employment sub-index dropping to 44.8 from 50.4 in February.

Dubai government extended the closure of all non-essential commercial activities till April 18. Separately, Dubai’s department of finance has asked government agencies to cut administrative and general expenses by at least 20%, halt new hiring and also to postpone all construction projects that have not begun.
Ajman’s Crown Prince announced initiatives to support firms affected by the Covid-19 outbreak. For the trade and customs sectors, support includes paying customs duties with easy payments within 90 days, extending the free period for storing containers to 20 days from 10, and reducing container insurance fees by 50% for each container until end-June 2020. In the tourism sector, registration fees are exempt, payment of fines are postponed, and penalties are cancelled for tourism firms and hotels. For the real estate sector, initiatives include cancelling administrative fines for every violation of real estate registration renewal.

The Dubai Financial Supervisory Authority (DFSA) announced relief measures for DIFC-based regulated firms: for new firms, there will be a 50% reduction in application fees for the remainder of 2020 and flexibility in requirements for permanent premises and for domestic funds, there will be a waiver of registration fees for the remainder of 2020. For existing firms, an extension for filing returns and reports, flexibility in meeting Authorised Individual obligations, temporary relief from capital requirements for firms which do not hold or control Client Assets or hold Insurance Monies and a waiver of listing fees for new SME issuers in the DIFC for the remainder of 2020 (among others).
 
Real estate transactions in Dubai grew by 10% YoY to 10,243 in Q1 this year. In the month of March, there were 3124 transactions to the tune of AED 6.99bn; this month also saw the highest number of mortgage registrations (+24.8% YoY to 1209) since October 2019.
UAE’s banks have revealed their exposure to the hospital group NMC Health which recently revised its debt position to USD 6.6bn: ADCB (USD 981mn), Emirates NBD (AED 747.3mn including AED 676.5mn linked to Emirates Islamic Bank), Dubai Islamic Bank (USD 425mn) and Noor bank (USD 116mn).
Emirates Airlines is looking to raise billions in loans from local and international banks, reported Bloomberg, after being promised Dubai government support the week before.

GCC Special Report: How are GCC nations financing the stimulus packages?
As the Covid-19 pandemic continues to affect the GCC, imposing curfews and restrictions on movement has become the norm, alongside various levels of stimulus packages being rolled out to support the economies. The packages have a few measures in common – rate cuts, liquidity enhancing measures, deferring of loans/ credit card payments as well as support for SMEs and affected sectors (specifically trade, tourism and hospitality). Overall stimulus measures in the GCC have crossed over 10% of 2019 GDP and with the sharp dip in oil prices (and subsequent decline in revenues), options to finance this spending are via (a) spending cuts; (b) drawdown international reserves at the central banks; (c) support from SWFs; and/or (d) borrowing from international/ regional markets. However, with additional liquidity in the market, will banks be willing to lend to the public sector in need of funds for the private sector (with a higher risk of rising NPLs in the medium term)? There remains a significant risk of crowding out lending to the private sector.

Among the four options mentioned above, spending cuts have been common – from Oman slashing government companies approved expenditures by 10% for 2020 to Saudi Arabia’s reducing 2020 budget by less than 5% or more recently Dubai asking its government agencies to cut administrative and general expenses by at least 20%. In addition, governments have also responded by cutting (mostly capital) spending (latest being Dubai and Qatar) magnifying the negative effect on the non-oil sector.

During the past week, Qatar and Abu Dhabi have tapped the market (option d) via bond sales – both offered at some 30-40bps above the existing curve – while the Dubai government raised AED 1bn from a private placement of a Sukuk. Support from the central bank will likely be evident in the next few data releases: Egypt has already witnessed this. As for support from sovereign wealth funds, given lack of transparent data, it will be difficult to gauge the actual value, but their optimal role would be to: (a) tap into investments abroad (starting with sale of money market instruments like T-bills); (b) re-assess long-term investment strategies to play a larger role domestically in supporting local industries, innovation and developing digital assets. 

Most hit segments in the GCC are transport, followed by retail and recreation (except in Bahrain where the places are swapped). In Jordan and Lebanon, transport has declined by a substantial 88% and 81% respectively. With remote working practices encouraged across the MENA region, workplaces have taken an extreme hit in Jordan (-70%), UAE (-57%) and Iraq (-55%) compared to baseline levels.

Global News:
Stock markets gained as stimulus packages continue to be announced out across the globe and on hopes that lockdowns would curb the spread of Covid-19: Wall Street rallied, European markets were up. Volatility in financial markets (the VIX index) was close to its lowest levels since October 2019. Regional markets were higher last week (except Bahrain and Kuwait): expectations of an OPEC+ deal boosted oil exporters’ markets, while government bonds sales in Qatar and Abu Dhabi also supported market sentiment. The dollar remained soft while emerging market currencies gained. Over the weekend, the OPEC+ committed to cut 9.7mn barrels a day from global supply – the biggest supply reduction on record- also facing the largest demand fall on record; markets were closed for Easter, but oil prices had risen in anticipation of the deal and were near $30 a barrel. Gold price meanwhile hit a 1-month peak.

Though US passed Italy with the highest number of Covid-19 related deaths globally, there was some optimism as the rate of contagion of the pandemic eased (lockdowns seem to be working, as numbers in Italy and Spain ease; India plans to extend the nation-wide lockdown for 2 more weeks; Chinese authorities lifted a lockdown imposed in late January on Wuhan, the initial epicentre of the outbreak). However, with much of the world struggling with the pandemic still, export orders for Chinese manufacturers are sinking, raising fears about the second wave of a demand shock. WTO’s forecasts trade to plummet by 13-32% in 2020 alongside a steeper decline in sectors with complex value chains (e.g. electronics, automotive products), reflecting the consequences of the ongoing shock, while potential slow recovery is expected next year (but dependent on the duration of the outbreak and policy effectiveness afterwards).

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SOURCE:
Nasser Saidi & Associates