(Report by S&P Global)
Sovereign ratings can benefit from donor support, particularly for smaller economies that are
more vulnerable to external shocks (including terms of trade shocks). Depending on the form of
support, whether it is a loan or a grant, budgetary or balance-of-payments related, funding may or
may not add to the government’s debt burden. S&P Global Ratings only rates sovereign
commercial debt, but a sovereign’s access to bilateral noncommercial financing generally lowers
that country’s cost of financing and benefits its debt profile, for example by extending average
debt maturities and hence reducing commercial refinancing risks.
Historically, funding from higher-rated Gulf Cooperation Council countries (Saudi Arabia, the
United Arab Emirates, Kuwait, and Qatar) has supported a smaller group of strategic allies. Recent
pledges to a broader group of countries reflect a more active foreign policy and evolving
geopolitical priorities. To some extent, we see geographical divergence between the recipients of
Qatari donor support and the rest of the GCC.
In our experience, the actual disbursement of aid from the GCC is not always consistent, fully
disbursed, or large enough to alleviate financial pressures for the recipient countries. We
anticipate that GCC sovereigns will likely prioritize funding to key regional partners in the context
of volatile oil prices, weaker GCC net asset positions, and their respective domestic agendas of diversifying their economies away from hydrocarbons.
We expect that further support from the GCC countries in the event of financial stress would be
forthcoming for Bahrain, Oman, and Jordan. This expectation offers additional support for the
ratings on these three sovereigns. There continue to be strong political and economic ties among
GCC sovereigns (barring the dispute with Qatar). More importantly, we believe that GCC countries
will strive to prevent contagion effects from pressure on the currency pegs of Bahrain or Oman and
spillovers of social and sectarian tensions. For Jordan, the rating support also comes from the
continued strong grant assistance provided by the U.S., given that Jordan’s political stability in the
region is a key foreign policy goal for the U.S. (as well as the GCC). The ratings on Egypt were
supported by significant GCC financial support in the past. However, Egypt has reduced its
reliance on GCC funds and diversified its funding sources, and we do not factor further material
GCC support into our ratings.
Past aid packages have been beneficial but not always fully disbursed
Donor support from the GCC countries to sovereigns in the Middle East and Africa has come in
several forms. In general, we view this support as beneficial for the recipient. In many cases, however, it does not address underlying structural weaknesses, and sometimes the existence of
contingent aid may even be a disincentive to structural reforms. Moreover, bilateral financial
support is often not a funding source that smaller sovereigns can rely upon, as its extension can
be unpredictable and conditional upon political agreements. In Morocco, for example, lower GCC
grants, among other factors, have contributed to rising budgetary pressures, which in turn played
a part in us revising the outlook on the sovereign rating to negative in October 2018.
For recipient countries, budgetary grants provide the most flexibility; they are fungible,
non-debt-creating, and therefore carry no interest costs. Grants help to reduce government
deficits by boosting revenues and support the balance-of-payments position through official
transfers. Funding directed towards investment projects are also usually grant-like, meaning
there tend to be no or low borrowing costs and no principal repayment. However, donor countries
have the discretion to target specific sectors, projects, and beneficiaries. In the case of Bahrain
and Oman, project selection and other bureaucratic processes have delayed the actual
disbursement of these funds.
Donor deposits in the central bank and currency swaps provide immediate external liquidity and
increase foreign exchange reserves, but they also add to the country’s external debt and interest
costs, albeit often on concessional terms. GCC countries have extended deposit maturities in
several cases. Donors have also provided funding support through concessional loans, which add
to government debt but have low borrowing costs and longer maturities relative to market funding.
Recent Donor Pledges Are More Debt-Like
Despite weaker net asset positions relative to pre-2015 levels due to the drop in oil prices, GCC
countries have pledged a large sum of funds to a broader group of countries. Recipient countries
are facing myriad challenges including wars, volatile oil prices, and other external shocks. At the
same time, the GCC countries have, in our view, veered toward a more activist foreign policy and
are focused on building political, military, and trade alliances in the MENA region and the Horn of Africa. Geopolitical risks in the region have increased, as evidenced by rising tensions between Iran and Saudi Arabia and the UAE, ongoing conflicts in Yemen and Syria, and the blockade on Qatar since June 2017. Shifting alliances have also resulted in more aid being pledged by individual GCC countries rather than a unified GCC bloc.
We also note that the funding mix comprises more debt-type support including deposits and
concessional loans and specific investment spending, whereas the grants portion is now
insignificant. There is an obligation to repay this debt although deposits are more likely to be
renewed if the geopolitical situation is conducive. We expect that actual disbursements of aid,
particularly for project funding, will be slow and likely fall short of the promised amounts, as was
the case for Bahrain and Oman. Yet, injections of deposits will help to shore up foreign exchange
reserves in countries facing balance-of-payments shocks (including Bahrain, Pakistan, Jordan,
Ethiopia, Sudan, and Yemen) and are substantial as a percentage of GDP for the smaller
sovereigns like Yemen and Sudan.