EUR 48.53 For Business Accounts Only

MENA macro | COVID-19 implications: Lower oil prices weigh on GCC finances; Lower rates give Egypt fiscal room

Kuwait most vulnerable, Egypt reform gains mitigate headwinds. The drop in oil prices (c-60% y-t-d), closed borders, and major supply disruptions, are weighing down on global economies. Among our coverage, Saudi is hit on its oil and tourism receipts, but its leading role in controlling oil prices, off-budget financing options, and capacity to issue debt allow it to withstand current pressures. Kuwait’s revenues are 70% oil-dependent, making it most exposed to current conditions as long as it does not pass its debt law. Egypt’s zero net oil trade balance and almost freeing the fiscal budget from energy subsidies are key buffers against the current backdrop.

Saudi, Kuwait to cut on capex, main driver of non-oil GDP. We expect every USD10/bbl drop in oil prices to raise Saudi’s deficit and funding needs by cSAR90bn in 2020e, possibly pushing deficit to 8% of GDP, at USD54/bbl (y-t-d average). This puts funding pressure on the government, potentially triggering the accumulation of dues to the private sector and cutting expenditure on entertainment, construction, and infrastructure projects. We test the impact of cutting Saudi’s tourism revenues for three months by 25%, putting non-oil GDP growth at 1.1% in 2020e vs. 3.3% in 2019. In Kuwait, revenues would record KWD12.69bn vs. an estimated KWD18.01bn in 2020e, at USD54/bbl. Accordingly, capex could drop to 9.07% of total spending, below the budgeted 16.0%. This im­plies a depletion of the GRF over two years (first time in its history) vs. our forecast of four. This would likely lead to expedited approval of the debt law, in our view.

Monetary easing immaterial to GCC, gives fiscal room to Egypt; FCY buffers limit downside on EGP. We see no positive impact on sovereign borrowing in Eurobonds across our coverage from lower rates, as risk premium rises. That said, being the most leveraged (87% of GDP) vs. Kuwait and Saudi (24% of GDP), Egypt’s cost of local debt should benefit from lower yields (each 0.5% drop leads to EGP5bn savings on the budget level). We expect Egypt’s FCY buffers of cUSD30bn (deposits not in NIR and NFAs) to limit short-term pressures on the EGP, assuming a harsh scenario of USD2.5-3bn lower tourism revenues in 2Q20, along with further foreign portfolio outflows, reaching cUSD8-10bn as of Feb-20 to date (as per our market intelligence). We see this further mitigated by a possible drop in import-driven demand. We anticipate some containment of the cost curve, on lower energy costs.