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The Gulf Increasingly Seen as a Safe Haven

The second quarter of this year saw the GCC financial markets put up a show of considerable resilience in the face of elevated global economic uncertainty as the Euro-zone crisis deteriorated. In spite of recurrent volatility, regional trading and issuance conditions were marked by considerable continuity as compared to the far less stressful opening months of the year, reflecting the emerging consensus that the GCC is now one of the relatively safe havens in the global financial markets. This stability was particularly evident in the area of bank credit where continued growth in much of the region was underpinned by favorable macroeconomic conditions. Positive progress looks set to continue, although signs are multiplying that last year's post-crisis rebound in many countries may be gradually giving way to more stable market conditions. Even though especially Saudi inter-bank rates have edged up, largely in reflection of the growing demand for credit, the regional banks are strong and liquidity conditions benign. The UAE and Kuwait continue to lag behind, however, due to a combination of largely country-specific factors.

The performance of the regional equity markets provided a study in contrasts. In the words of Chief Economist Dr Jarmo T. Kotilaine of the National Commercial Bank, "The regional bourses reacted sharply to the external uncertainty during Q2 with both valuations and trading volumes hit virtually across the board. In spite of this, new IPO activity reached its highest level since 2Q09, USD1.1bn, although the number of new offerings was only four. While it may be too soon to speak of a trend, signs are multiplying that the long period of minimal activity in the regional IPO space may now be over." Even as the regional secondary markets lost much of the gains they had made during the opening months of the year, both in terms of valuations and volumes, Q2 came to account for a lion's share of the primary offerings during the first half of the year. In the aggregate, 1H12 saw six IPOs worth USD1.2bn. Saudi Arabia remains by far the dominant center of IPO activity in the region, accounting for three of the four offering in Q2 and five of the six in 1H12. A 31% rally on Tadawul between November and April, accompanied by a sharp rise in volumes, helped create auspicious conditions for new offerings. The only other GCC market to see primary activity was Oman - the only other regional stock market to have experienced any IPOs during the past year. Saudi issuance in Q2 totaled USD945.6mn in value whereas the one Omani IPO was worth USD159.0mn.

After two stronq quarters, conventional bond issuance in the GCC was hit in Q2 by the external market stress. Nonetheless, significant new activity did take place, with considerable foreign investor interest in the international issues. Moreover, during a time of a relative retreat by corporates, the quarter saw a landmark USD1.5bn issue by the Kingdom of Bahrain while Oman and Kuwait continued their ongoing bond issuance. All in all, the quarter witnessed 22 GCC conventional bond issues with maturities in excess of a year. Their aggregate value reached USD4.6bn, roughly equally split between corporate (USD2.2bn) and sovereign (USD2.4bn) issuance. Although this total was somewhat down on the 1Q12 figure of USD5.9bn, the performance of the market must be deemed generally impressive in view of the external conditions. In the words of Kotilaine, "While it is clear that Western investors were active buyers of GCC issues, important development took place also on the supply side. In particular, there are growing indications of bonds increasingly playing a role as the classic tire 'reserve tire' As some jurisdictions continue to face restrictions in the area of bank funding, bond issuance is in many cases services as an alternative. For instance, the UAE Central Bank has imposed more restrictive rules on bank lending to government-related entities, pushing more of them to the capital market."

The sukuk market has remained one of the brightest spots of the GCC financial sector over the past quarter. Although overall issuance in Q2 fell short of the volumes seen in the opening months of the year, many of the positive trends observed during the past year have not only continued but been further consolidated. New types of issuers are tapping the market and activity has resumed even in the sovereign segment as Dubai tapped the Shariah-compliant market with a highly successful government sukuk. Q2 saw a total of nine issues of more than a year with an aggregate value of USD5.0bn. This was down on Q1 issuance of USD8.3bn but ahead of the USD3.3bn seen in 4Q11. In a departure from the commanding Saudi dominance during Q1, Saudi and UAE issuers were almost equally important. Three UAE names placed a total of USD2.4bn in the market while Saudi Arabia (including the Jeddah-domiciled Islamic Development Bank) saw a total of five issues worth just under USD2.4bn. Global sukuk issuance during the quarter rose to USD23.9bn, down on USD35.3bn in Q1, with Malaysia remaining the dominant sukuk market internationally.

The regional secondary markets were characterized by relatively benign trading conditions throughout the quarter in spite of external market stress. Both the bond and sukuk yields have remained at historically low levels, even if temporary spikes attest to the continued sensitivity to exogenous shocks. Sukuk have continued to enjoy an edge over conventional bonds, marking their increasingly established popularity as an asset class and a perceived relative safe haven. "Most issuers are high-quality names and the resilience of the market has benefited from clustering around popular structures as well as a greater understanding of how to deal with problem situations. Moreover, tighter spreads have made the sukuk market more competitive as more banks target the asset class. A further impetus to the regional markets has come from the continued improvement of conditions in Dubai and Bahrain, which have tended to be seen as the riskiest jurisdictions. In Dubai, the most challenging near-term refinancing/restructuring operations have been successfully dealt with," noted Kotilaine.

Alternative sources of capital remain important, but a clear reallocation is underway. Although the regional governments continue to play a key role in supporting economic activity, including large investment projects, their role seems to be becoming somewhat less central. Sovereign funds have retreated as banks and bonds/sukuk have come to the fore. Also foreign direct investment flows have been hit due to global and regional factors. Private equity activity remains subdued, even though expressions of interest seem to be multiplying. The reshaping of the regional syndicated loans market appears to be continuing with European banks generally expected to play a less central role than in the past. By contrast, the regional lenders are clearly stepping to the plate and filling some of the vacuum. In particular Saudi banks have reached a historic record in loans syndications, arranging an estimated total of USD4.2bn in the first five months of the year. Overall loan syndications during the quarter reached approximately USD20.4bn. Activity was dominated by Saudi Arabia which accounted for 49% of the total, followed by the UAE's 41% share.

© Press Release 2012

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