Middle East oil producers began to tap the debt markets this week amid growing fiscal pressures on their economies and wealth funds in the oil price crash and the coronavirus pandemic.

Qatar, one of the least vulnerable producers in the Gulf Cooperation Council (GCC), according to analysts, sold on Tuesday US$10 billion in three-tranche bonds, which received four times as many offers—a sign that investors lapped up the ‘juicy yields’ that Qatar offered.  

Qatar’s bond issue—the first in the Gulf region since oil prices crashed and the pandemic battered economies and oil demand—is viewed as a test for investor interest in bonds from Middle East’s oil producers amid collapsing oil prices. Analysts and investment managers believe that other Gulf nations, including OPEC’s top producer and the world’s top oil exporter, Saudi Arabia, may soon follow Qatar on the bond markets, especially if oil prices stay around $30 a barrel.

The economies of the six members of the Gulf Cooperation Council (GCC)—Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates (UAE)—are suffering from oil prices well below fiscal break-evens, a collapse in demand for the Gulf’s key export commodity, and a coronavirus pandemic in those countries, forcing them to tap buffers and funds for stimulus packages.

The oil price crash and the pandemic laid bare what analysts projected since the previous price collapse in 2014—despite years of claims of efforts of economic diversification, the Middle East’s oil exporters are still heavily dependent on oil revenues. They are now looking at ways to mitigate the pain from oil prices that are two and even three times lower than their budget breakevens.  

Analysts believe that all Gulf Arab oil exporters will turn to the bond markets to raise cash, although some may wait to see if a broad group of producers can reach some kind of a production cut deal to stop the price slide and global oil inventories from overflowing.

“Some might wait till the oil feud gets resolved. Qatar is probably taking the first-mover advantage,” Zeina Rizk, executive director at Arqaam Capital in Dubai, told the Wall Street Journal, commenting on Qatar’s bond sale on Tuesday.

Qatar’s strategy to tap the bond market first could pay off because other issuers in the region, including Saudi Arabia which is in a feud with Qatar, will be competing later for investors’ attention and money.

The tiny Gulf monarchy, which is one of the world’s top liquefied natural gas (LNG) exporters, has delayed projects amid the coronavirus pandemic and the oil price crash.

Yet, Qatar is in a stronger fiscal position than many other oil-producing nations, according to Moody’s. Robust sovereign balance sheets will support Qatar through the price crash, the rating agency said at the end of March. Of the GCC countries, the UAE is also in a stronger position, and to a lesser extent—Kuwait and Saudi Arabia, Moody’s said. The most vulnerable oil producers in terms of credit profiles are led by GCC members Oman and Bahrain. 

According to Fitch Ratings, Qatar has the lowest breakeven price – the oil price required to balance the government budget, all else being equal – of the oil-exporting countries in the Middle East and Africa. Qatar’s breakeven price is $55 a barrel Brent Crude, some $20 lower than the current price, but also much lower than Saudi Arabia’s $91 a barrel breakeven price.

“For higher-rated oil-producing sovereigns in the GCC, such as Abu Dhabi (AA/Stable), Kuwait (AA/Stable) and Qatar (AA-/Stable), ample fiscal and external buffers will provide greater headroom to weather the shock,” Fitch said right after Saudi Arabia launched the oil price war, sending oil tumbling 25% in a day.

The collapse in oil prices, driven by sinking demand and the Saudi-Russia break-up, is set to “significantly widen’’ fiscal deficits in GCC countries, and those wider deficits will accelerate drawdowns from wealth funds and debt issuance, Fitch said later in March.

Back then, there weren't signs that Saudi Arabia and Russia were looking to return to the negotiating table. But the Gulf producers, including the Saudis, had already started cutting budget expenditures to limit draws from their sovereign wealth funds as much as possible at oil prices so low that budget deficits will begin to balloon soon.

Even if major oil producers manage to reach some kind of an OPEC++ pact, Qatar’s bond issue may not be the last from the Persian Gulf this year, because this oil price crash has made one thing crystal clear—the Middle East continues to depend on oil despite all the diversification talk since the previous crash.