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Corporate and sovereign offerings of both conventional and Islamic bonds are expected to maintain their momentum in Sharjah after a strong showing last year.
In late February Bank of Sharjah released its initial guidance on a planned five-year, unsecured international bond yielding 250 basis points (bps) over the mid-swap rate, according to a document issued by the lead banks participating in the operation.
The total amount issued could reach $500m – the same as the lender’s first offering in 2015 – with the board having secured earlier shareholder approval to issue bonds worth up to $1.5bn for general corporate purposes.
Bucking the trend
In addition to conventional bonds, Sharjah witnessed the issuance of two sukuk (Islamic bonds) last year totalling $1bn, a new milestone for the emirate.
The first was offered by the government in January in the form of a $500m, five-year sukuk priced at a spread of 250 bps over mid-swaps. The second, offered by Sharjah Islamic Bank, the emirate’s largest lender by assets, raised another $500m and was oversubscribed by more than three times.
The issuances came amid a regional and international slowdown in the sukuk market, which shrank from a peak of $137.6bn in 2012 to $60.7bn in 2015, according to latest figures from the International Islamic Financial Market .
Against a backdrop of widening budget deficits related to lower energy prices, most GCC nations have opted for conventional bonds – including Saudi Arabia’s record-breaking $17.5bn international bond in October, the largest ever by an emerging market – due to the greater complexity, cost and maturity associated with sukuk issuances.
Fiscal pressure
Sharjah’s sovereign sukuk was an attempt to help narrow the deficit, which is widening due to increased government spending, with the emirate’s 2017 budget raising total public spending by 3% compared to 2016, combined with delays in the implementation of revenue-raising measures, such as land sales.
As a result, in late January ratings agency Standard & Poor’s (S&P) downgraded the emirate’s long- and short-term foreign and local currency sovereign credit ratings from “A” and “A1” to “BBB+” and “A2”, respectively, following a premonitory change in outlook from stable to negative last August.
Among the main reasons for the downgrade was a rapid increase in Sharjah’s debt as a percentage of GDP and lower-than-anticipated fiscal consolidation.
Although acknowledging that the emirate maintains a relatively moderate debt-to-GDP ratio, the agency cited concerns with the speed of its rise, saying that gross government debt is expected to average 18.9% of GDP in the 2017-20 period, up from a 13.4% average over the past three years.
Furthermore, with more than 60% of outstanding debt held by non-residents and over half denominated in foreign currencies, the government’s external vulnerabilities are more pronounced.
According to the figures released by S&P, the fiscal deficit was about 2.1% of GDP last year and interest payments are projected to stay above 5% of revenue through 2020, leading the firm to predict Sharjah will tap international bond markets again to cover those deficits.
However, continued interest rate hikes by the US Federal Reserve, added to the credit downgrade, could put upward pressure on Sharjah’s external funding costs.
Regional landscape
Sharjah is not the only player ramping up its bond issuance activity; regional corporates and sovereigns alike have been looking to international bonds to raise capital.
Bahrain-based Gulf International Bank was the first regional lender to raise debt internationally this year with a $500m bond sale in January set to mature in 2022. This was followed by a $1bn sukuk from Dubai Islamic Bank and a $500m conventional bond issue by Ahli Bank Qatar.
In the sovereign sphere, Kuwait tapped international debt markets for the first time in March, raising $8bn in an oversubscribed bond sale. Meanwhile, Saudi Arabia is planning the sale of domestic sukuk to help invigorate its local Islamic financial market, which would complement further issuances of international bonds.
According to Mohammad Al Tuwaijri, secretary-general of the Finance Committee at the Saudi Royal Court, the Gulf’s leading oil exporter is expected to raise between $10bn and $15bn from international bond markets in 2017. As part of this, state-operated oil company Saudi Aramco is gearing up to launch its first public bond sale valued at roughly $2bn in the near future.
© Oxford Business Group 2017
