Welcome to Zawya Markets. Each Sunday we will be featuring an interview with a different analyst or markets expert from around the region.

If you would like to participate please email gerard.aoun@refinitiv.com.

1) What are the prospects for long-term U.S. dollar funding and non-U.S. dollar funding?

Presently, the conditions are positive for United States dollar issuance. We have seen deals clear easily in the market during the first quarter and the recent shift by the U.S. Federal Reserve towards a more dovish tone is favourable for fixed income issuance. During the past week, we have seen strong interest in the new RAK Bank and FAB deals that have come to the market and right now, there is a growing order book for Aramco’s jumbo deal, which is very encouraging.

We do not see a lot of non-U.S. dollar funding in this market. The well-known, better rated issuers, such as some of the bigger banks, do raise funding in currencies like the euro, Swiss franc or Japanese yen, but these are generally smaller and more opportunistic deals. They largely depend on whether the currency swap market is working in their favour, because they need to swap it back into dollars, usually — which is a functional currency they can employ.

2) What is the outlook for the U.S. dollar in 2019?

We have seen the U.S. dollar appreciate just under 10 per cent since early 2018. However, most of that appreciation occurred during the first part of 2018, mostly prior to the summer break. Since then it has been fairly range-bound.

Initially, we were expecting the U.S. dollar to become stronger this year. However, with the U.S. Federal Reserve’s current position, we expect that it will probably stay range-bound around the current levels.

3) What is the outlook of growth, capex and refinancing in Gulf Cooperation Council (GCC) countries?

We have to appreciate that the region is still on a recovery path following the collapse of oil prices in 2014-2015. Government spending took a big hit, subsidies were cut, and reserves were used to fund government deficits.

A structural change like this takes a long time to adjust to and dents confidence. It is a dent in the confidence of the government to invest in big projects and a dent in the confidence of private companies to make their investments.

However, we are gradually seeing confidence return, particularly from governments, and some of this is translating into capital expenditure. Overall, we see that the banking sector asset growth this year will be similar to that of last year, in the 5 to 7 per cent range. We are still some way off from the heady days of double digits that we saw three years ago.

4) What are the biggest risk factors both for MENA markets and global markets in the coming weeks?

With the Turkish elections behind us now, I am not seeing any significant risks that would impact the MENA markets in the next few weeks. A breakdown in the U.S.-China trade discussions would obviously be bad for the global economy and have a negative impact on all markets.

Brexit is the other well-discussed issue. However, I don’t see that the outcome of Brexit will have any lasting, material impact on our market or the global markets.

5) How is uncertainty around global economic growth affecting the fixed income space?

In the short term, uncertainty about global growth is translating into lower rates. The lower rates are having a positive impact on the revaluation of existing bond and sukuk issues. With lower rates, liquidity available in the market, and regulators willing to take an accommodative stance, there is a positive environment for new issues.

However, in the longer term, the impact of lower growth is not good. Emerging markets tend to be more impacted during economic downturns and if that slowdown turns into a recession, the negative impact will be significant.

Our investment view at the moment is to take a more defensive position—gradually moving to shorter dated investments with higher rated issuers.

6) Debt issuance by corporate entities in the GCC continued to increase last year, even as government issuance shrank. What’s your view on this market?

The corporate issuance market is interesting. Smart issuers see the value in having a diversified funding base. Electing to access the debt capital markets for funding at times can be more expensive than just simply taking financing from a bank. However, the issuers gain diversification in their funding sources, particularly by getting access to foreign investors.

Two recent corporate issues in our market that come to mind are the Aldar Investment Properties sukuk and the Almarai sukuk. Almarai, in particular, approached their transaction in a very strategic manner - they were patient in waiting to pick the right time to come to the market and they weren’t greedy when it came to pricing.

New issuers with a strategic mindset access the market when times are easy. When things get tough in the market, it is unlikely that they will be able to get funds as a first-time issuer.

7) What are the risks of investing in GCC bonds compared to their emerging market peers? And what are the benefits?

The prosperity of the GCC is highly correlated to the price of oil, decoupling that correlation is a long-term game. Anything that impacts the price of oil is going to have some effect on GCC sukuk and bond prices.

On the positive side, GCC issues tend to fare better than the rest of the emerging markets when investors go into a risk-off mode. This is due to the relatively stronger rating of GCC issuers, strong central bank reserves in this region and also the willingness of governments to support their economies.

8) 2018 was a poor year in terms of emerging market debt issuance and demand. Is this likely to continue in 2019, and how will this affect GCC issuers?

The rising rate environment and trade wars had a major impact in 2018, both from a valuation point of view and also from the willingness of investors to put new money to work in the market.

2019 has proven to be much better and there are no obvious signs why this would change. The U.S. Federal Reserve has made a dovish pivot and the U.S.-China trade issues seem to be moving towards an amicable resolution.

The sukuk issuance market has been quieter than we expected in the first quarter of the year but the deals that have come to the market have done very well. We have seen positive momentum in those deals that have been done to date, which includes the jumbo issue by Qatar and what we are seeing from Aramco at the moment.

Debt capital market financing this year could reach somewhere around $80 billion from GCC issuers and about $25 billion of that would be refinancing of maturing trades. We could see some tier-one capital issuances from banks, which would be of interest to private wealth investors.

9) What are the challenges facing the sukuk industry in the GCC and in which sectors do opportunities lie?

Sukuk is now a globally accepted asset class. Some of the world’s largest investment managers for example participated in Noor Bank’s own sukuk that we issued.

One of the biggest opportunities in our market that has my attention is the local currency sukuk issuance. We have seen the growth of Saudi riyal-denominated sovereign issuance in KSA. The secondary market there still needs to be developed but the foundations are forming.

We need to see the UAE move down that path as well. This will require the federal and the individual governments of all the Emirates to come to the market with local currency issuance. The UAE now has the federal debt law in place, so the legislative frameworks are there to facilitate this.

10) Do you think there is a way for sukuk to be used in the growing market for green bonds? If so, how?

Yes, I do. The principles of green issuances are completely compatible with shari’ah finance. We have already seen the Indonesian government issue a $1.25 billion green sukuk in February 2018. The key is to have the appropriate underlying projects so that the funds raised can be deployed in a green way.

I believe alternative energy projects such as solar parks should be the ideal place to start. Increasingly, what we are seeing is that investors are factoring in environmental, social and governance considerations into their investment decisions. Issuers need to be mindful of this when they are thinking about their funding strategies.

(Editing by Gerard Aoun and Michael Fahy)


Any opinions expressed here are the author’s own.

© Opinion 2019