Deficit lessons from Mr Micawber

Regional financial policymakers should study Charles Dickens.

The British novelist invented one of the enduring characters of fiction in Mr Micawber, whose recipe for happiness was to always ensure that income exceeded expenditure; if it fell short, even by a minuscule amount, the result was misery.

Mr Micawber was working in the old British currency of pounds, shillings and pence, while modern-day financiers are grappling with billions of dollars. The IMF recently estimated that the countries of the Gulf would suffer an accumulated budget deficit of US$900 billion by 2021.

Unless that shortfall is tackled, it could be misery all around. An event in Dubai this week gave some illuminating insights into how the budget planners could balance the books in the new economic climate produced by low energy revenues.

Fisch Asset Management, a venerable Swiss financial outfit, was in town to give its own analysis of the deficit challenge. In a nutshell, the region has three options: it can borrow money; it can sell assets; or it can tap into its vast reserves.

The latter would probably be the solution the prudent Mr Micawber would prefer, but ideals of economic rectitude have moved on since the Victorian era. Regional governments do not want to blow all their loot on funding government expenditure. Dipping into reserves can fund some of the deficit – maybe up to a third, or $300bn – but not all.

The preferred courses of action combine the other two options. The recently announced Saudi strategy has so far focused on the need for asset sales, via initial public offerings, as a cash-raiser. Saudi Aramco is the flagship of this programme. If a stake does come to market it could raise as much as $100bn in the biggest IPO in history. If successful (a big if) it could also spark an IPO frenzy in the region, with telecoms companies, utilities, energy assets and airlines all potential candidates.

In this context, I wonder how long before the idea of an Emirates airline IPO is taken down from the shelf and dusted off? It’s rumoured that one big US bank is working on such a plan again. We shall see.

All in all, Fisch reckons IPOs and asset sales could pull in as much as another $300bn. That’s a big challenge.

Finally, there is the renewed imperative to go to the global debt markets for the balance.

The problem here is that, with public finances deteriorating as long as the oil price stays low, the ratings of regional sovereigns and government-related companies will also deteriorate. Debt will be harder and more expensive to obtain.

But needs must be met, and the UAE in particular, with the best ratings in the region, can still tap the international debt markets.

Expect a raft of downgradings, but also a rush of issuance. Fisch thinks convertible bonds, little understood or used in the region, are the way forward – and that’s an idea worth exploring.

A modern-day Mr Micawber would be spoilt for choice.

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