The decline in oil prices over the past three years has pushed GCC countries to raise capital to fund the expected budget deficits in the near term
Sunday, Jul 16, 2017
Debt issuance from the Middle East surged more than 50 per cent in the first half of 2017 compared to the same period last year with GCC sovereigns and government related entities leading the issuances, according to latest statistics from Thomson Reuters.
The decline in oil prices over the past three years has pushed GCC countries to raise capital to fund the expected budget deficits in the near term as the surpluses accumulated over the past decade or more could support future deficits for only a limited period of time.
Bolstered by Saudi Arabia’s $9 billion international Islamic bond in April and Kuwait’s $8 billion debut international bond sale in March, Middle Eastern debt issuance reached $57.4 billion during the first half of 2017, 53 per cent more than the proceeds raised during the same period last year and by far the best annual start in the region since records began in 1980.
Saudi Arabia was the most active nation in the Middle East accounting for 21 per cent of activity by value, followed by Kuwait with 18 per cent. International Islamic debt issuance increased 50 per cent year-on-year to reach $31.4 billion so far during 2017.
JP Morgan took the top spot in the Middle Eastern bond ranking during the first half of 2017 with a 13.4 per cent share of the market, while HSBC took the top spot for Islamic debt capital market issuance with a 12.3 per cent share.
While the persistently low oil prices have widened fiscal gaps of most oil exporters from the region, analysts say the credit quality of many of the regional governments and entities are good and they will tap the international and domestic debt markets to tide over the fiscal squeeze.
“On the positive side, most of the regional oil exporters have adequate credit quality enabling them to comfortably raise debt in the international market. This is particularly the case with the GCC countries with almost all of the economies continuing to boast investment grade ratings despite several downgrades by rating agencies over the past 18 months,” said Faisal Hasan, Head — Investment Research at Kamco.
The key drivers to bond issuances in the GCC during 2016, which more than doubled to $66.5 billion, was primarily the sovereign bond issuances by Saudi Arabia, UAE and Qatar.
Bond issuances in 2016 almost doubled from the previous year in the Middle East and North Africa (Mena) primarily on the back of new sovereign issues by GCC countries that were aimed at plugging the budget deficit.
Saudi Arabia’s first international bond issuance valued at $17.5 billion in October last year was the biggest recorded emerging market bond, far outpacing the previous record of Qatar’s $9 billion sovereign bonds issued in May 2016.
Middle Eastern equity and equity-related issuance totalled $1.0 billion during the six months of 2017, a 72 per cent decline year-on-year and the lowest annual start for issuance in the region since 2004. Five initial public offerings raised $603.3 million and accounted for 60 per cent of first half equity capital market (ECM) activity in the region. Dubai-based oil and gas production services firm ADES International Holding raised $243.5 million on the London Stock Exchange in May, the largest IPO in the region so far this year. Follow-on offerings accounted for the remaining 40 per cent of ECM activity. The National Bank of Kuwait took first place in the first half of 2017 Middle Eastern ECM ranking with a 24 per cent market share.
Incentive to increase external debt issuance is higher because regional governments may be reluctant to liquidate too much of foreign reserves in order to have sufficient muscle power to defend the currency peg in times of need, and also because the return generated on foreign investments may actually be higher than the cost of debt. In addition, all GCC governments now have established Debt Management Offices and appear more in control of finding the optimal way to fund deficits.
Analysts say prospects for the region’s bond issuances in 2017 appear bright based on further funding requirement in the region by sovereigns and corporates as well as rising interest rates that would make bank funding costlier. Moreover, as the economic growth is estimated to pick up, spending by corporates on M&A and capital projects is expected to also grow that would have a direct impact on fixed income issuances.
By Babu Das Augustine Banking Editor
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