While the GCC sovereign issuance was quiet in the first quarter (1Q) of the year at $12 billion, still-favourable borrowing costs, high oil prices, and continued foreign investor interest are expected to keep market access relatively easy this year, a report said.
Meanwhile, global and GCC monetary policy has been tightened, while international and regional bond yields moved higher triggered by reflationary concerns, added the latest Economic Update released by the National Bank of Kuwait (NBK).
GCC yields moved higher alongside US Treasuries and escalating regional tensions. This was despite firmer oil prices – Brent rose 9 per cent quarter-on-quarter (q/q) in Q1 to $67/bbl – which would typically contribute to lower yields. Yields on 8-9 year sovereign debt for GCC sovereigns rose 40-64 bps in 1Q18, with Saudi and Bahrain up the most. The yield on the latter breached 7 per cent for the first time, while Kuwaiti debt was the lowest yielding, steady at around 3.8 per cent.
A combination of dollar-linked currency pegs and tightening interbank spreads saw GCC central banks follow the Fed’s 25 bps March hike. Interbank spreads had narrowed to decade lows, with higher policy rates looking to address this trend and support the attractiveness of local currencies.
In an unusual step, the Saudi central bank hiked its policy rate pre-emptively, one week ahead of the Fed’s move.
GCC gross issuance was at its weakest in almost three years, totalling $12 billion in 1Q18. Activity was boosted by Oman’s $6.5 billion sovereign issue, with most of the rest coming from the financial sector. Total outstanding regional debt increased by a small $2 billion to $438 billion, with growth easing to 14 per cent y/y. (Chart 7.)
Higher oil prices helped credit default swap rates – one measure of risk – decline for most GCC sovereigns in the quarter, while credit ratings and outlooks were largely confirmed. However, renewed concerns over fiscal and external positions led to credit rating downgrades for Bahrain (Fitch: to BB- from BB+) and Oman (Moody’s: to Baa3 from Baa2). Oman currently stands at the edge of the investment grade spectrum, while Bahrain moved deeper into sub-investment grade status.
GCC borrowing still seen strong in 2018
The prospect of higher rates, still-large fiscal needs, and relatively easy market access has favoured the frontloading of GCC borrowing in 2018. So far, 2Q18 saw both Saudi Arabia and Qatar issue sizeable bonds – $11 billion and $12 billion, respectively – with the latter engaging in its first international debt market foray since 2016. Saudi’s order book topped at $50 billion, while Qatar’s reached $52 billion; still reflecting deep appetite for GCC sovereign debt. Pricing was also competitive for both.
Although still accommodative, the climate for global fixed income is becoming slightly less positive. Still-strong global economic growth and a tightening labour market are expected to push global inflation moderately higher, implying tighter policy. However, recent data have hinted at softening growth in both the US and Europe, which could yet see monetary tightening/stimulus reduction proceed less rapidly than expected. Central banks are also expected to keep a close eye on financial conditions and levels of leverage, wanting to avoid instability by raising rates too fast. – TradeArabia News Service
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