Weekly Q&A: "We expect a stronger year for emerging market debt issuance"

Philipp Good - CEO and Head of Portfolio Management at Fisch Asset Management

January 27, 2019

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1) Why was fixed income issuance lower in 2018 than in the previous couple of years?

GCC issuance declined slightly. Issuance was lower because oil prices rose to $60-70 per barrel, and this boosted government revenues.

2) What are your expectations for 2019 in terms of total bond issuance in the Gulf?

With oil prices currently at significantly lower levels compared to the average 2018 level, there is a chance for the need for higher issuance if prices do not recover reasonably quickly. For example, Saudi Arabia expects a budget deficit for 2019 of $35bn, with the bulk to be funded from bond and sukuk markets. For GCC countries, spending on infrastructure and on the expansion of the non-oil sector to diversify away from oil dependence remains a priority, and this could drive issuance.

3) What are your expectations for 2019 in terms of total sukuk issuance in the Gulf?

The Sukuk market has been stalling in recent years and there is not much of a change expected. There is obviously a natural demand from the region and out of Asia for the sukuk structure, but the market is still relatively small.

4) What practical steps could be taken to grow the significance of the regional sukuk market?

A standardisation of the structures would certainly be helpful. But aside from that, I believe there is a natural supply/demand dynamic which doesn’t change much.

5) 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?

Several corporates from the region issued debt for the first time in a bid to diversify their funding base. Among those that issued were Senaat, NMC Health and Oman Telecom. There were also plenty of repeat issuers. We saw strong demand for the paper, both from regional and international investors, and this demonstrates the relative attractiveness of the asset class.

6) What impact do you think that the inclusion of five GCC countries into JP Morgan’s Emerging Market bond indices will have on demand for regional fixed income products?

The additional five countries will comprise around an additional 10 percent of the index. Roughly, $300bn in assets are benchmarked against the JP EMBI series, so we would expect strong inflows on that basis alone. Some of that money already entered the space in 2018, as active investors sought to get in ahead of the implementation date. We expect passive allocation to follow in February 2019. Over time, as investors become more familiar with the GCC, we’d expect further buyers to become attracted, which should also benefit corporate issuers.

7) 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?

We expect a stronger year for emerging market debt issuance, as global macro conditions ease somewhat.

8) How do oil prices affect government and corporate issuances in the region? What do you expect for 2019?

The oil price collapse in the fourth quarter will put pressure on GCC countries’ fiscal balances, meaning that lower oil prices will likely increase the need for external funding.

9) The Federal Reserve raised interest rates 4 times in 2018. Five out of six GCC countries have a currency peg, and have followed the Fed with rate hikes. What has been the impact of the changes in interest rates on issuances in the Gulf during 2018?

The widening of spreads, as a consequence of rising interest rates in the US, has been an important driver for investors. Emerging markets remain an attractive investment opportunity until a new equilibrium is found in rate markets. Within EMs, the GCC is probably most attractive. The peg versus the USD reiterates the attractive relative risk premium amid weakening EM FX and a strong USD. We do not expect a strong impact on issuance activities due to changes in interest rates.

(Editing by Gerard Aoun and Michael Fahy)

(gerard.aoun@refinitiv.com)

Any opinions expressed here are the author’s own.

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