If oil remains in its current price range of $55-$85 per barrel, the Gulf Cooperation Council (GCC) governments will have to spend more to boost their economies, ultimately forcing GCC sovereigns to borrow more, an investment outlook by First Abu Dhabi Bank noted. 

Low interest rates in dollars will add to the incentives of corporate and sovereign treasurers to issue bonds, according to Global Investment Outlook 2020.

In 2019, GCC countries issued a record $99.6 billion (until beginning of December) of bonds and sukuk (shariah-compliant bonds), the report said citing Bloomberg.

“Whether or not a similar amount will be printed in 2020 will depend on the price of oil and how much oil OPEC countries agree to pump.”

Five years after oil prices plunged from $100 per barrel, fiscal consolidation and diversification among GCC countries is moving slower than anticipated. While sovereign borrowers have introduced new revenue sources, such as value added taxes, the region is still highly dependent on the oil sector.

Bond issuances will also be supported by the generally high ratings of issuers in the region and the appetite for positive-yielding debt. Also, GCC credits offer higher returns than other debt in the same category, the report said.

In addition, many passive investors are now also buying bonds in the region, after some of the GCC countries were included in the JPMorgan Emerging Markets Bond Index. This helped Saudi Arabia and Abu Dhabi to sell record amounts of 30-year bonds last year.

“Full curves, index inclusion and a larger amount of bonds outstanding all contribute to higher liquidity for bonds in the region, which, again, make them more attractive. This means that if issuance comes near or even surpasses the record set in 2019, it is still likely to find plenty of buyers,” the report said.

Tepid economic growth?

The main drawback, apart from oil prices, would be economic growth, which could remain fairly tepid next year.

In 2020, the IMF expects the region to grow at 2.5 percent as credit conditions improve amid lower interest rates and as countries in the region ramp up infrastructure projects.

However, the ongoing trade war between the US and China and some regional geopolitical uncertainty have reduced investment in the region.

However, the FAB Investment Management expects a slow but more positive recovery in 2020. The World Expo 2020 in Dubai and the G20 economic summit in Saudi Arabia are expected to produce significant economic benefits for the GCC.

Also if the US Federal Reserve continues its loose monetary policy in 2020, fixed income issuances in the GCC region would benefit, “given that looser monetary policy in the US has a direct impact on the countries of the region, where many currencies are pegged to the US dollar.”

The report said Abu Dhabi continued to run an external surplus even as Brent crude average prices fell by some 13 percent in 2019 compared to 2018. There could be fewer issuances in 2020 as well (which could support bond prices), since the $10 billion issuance in 2019 was enough to cover total funding requirements.

The World Expo in Dubai and potentially higher average oil prices could help growth rebound in 2020.

For Saudi Arabia, faster expected growth of 2.3 percent this year would mitigate some of the borrowing needs and much of the public debt can be raised through local markets or through the borrowing of state-owned companies. The kingdom is expected to borrow between $12 billion and $18 billion in 2020.

Egypt, which is targeting GDP growth of 6.4 percent in the fiscal year that ends in June, 2020, borrowed from dollar bond investors twice in 2019, and both issues were received favourably. The government also continues to rely on domestic borrowing, fuelled by global investors seeking profitable carry trades.

(Writing by Brinda Darasha, editing by Seban Scaria)

seban.scaria@refinitiv.com

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© ZAWYA 2020