02 May 2017
Qatar may decide in June or September whether to issue an international bond or not, Bank of America Merrill Lynch said and noted that enough external financing was raised by the country last year to pre-finance a portion of fiscal needs this year.
“Our meetings suggested improvement on the fiscal front but that a further external debt issuance is not to be excluded this year,” BofA Merrill Lynch’s Mena Economist Jean Michel-Saliba wrote in the bank’s monthly report.
“A strategic decision has been taken not to tap the Qatar Investment Authority (QIA) foreign assets. This is in part due to the rate of return on QIA assets being greater than the cost of borrowing and as it allows QIA’s investment income to be reinvested,” Michel-Saliba said.
“It may also in our view reflect the lower liquidity profile of QIA although it appears QIA is now looking at increasing exposure to passive investments,” the report said.
As regards Qatar, BofA Merrill Lynch said, “If an external issuance takes place, it was suggested that a large bond could be raised, in line with historical precedents. In part, this may serve in our view to alleviate domestic liquidity. The recent uptick in government deposits in the banking sector suggests that a portion of external bond proceeds were deposited locally.”
The 2017 budget is based on oil prices at $45/b and pencils in a deficit of QR28.3bn ($7.8bn; 4.5% of GDP). Given the likely revenue outperformance, much will depend on spending discipline as spending is budgeted flat to last year’s budget (current spending down, capex spending up).
BofA Merrill Lynch said its recent meetings in Abu Dhabi and Dubai suggest that the UAE has managed a “soft landing”, with a less pronounced cycle than in 2008.
“We expect non-oil real GDP growth to have bottomed out as the fiscal drag eases and infrastructure activity picks up. The still supportive external financing backdrop and improved domestic liquidity supports refinancing of Dubai government-related entities (GREs). Aggregate Dubai public sector debt appears to have stabilised in nominal terms, although it remains at elevated levels,” Michel-Saliba said.
In relation to Bahrain, he said, “Our meetings suggest that the dollar peg continues to be under pressure but that GCC support remains firm.
Still, we anticipate that over time, the GCC is likely to require greater reforms from Bahrain to restore sustainability. As the lack of a passage of a budget prevents a return to international bond markets, we anticipate that technicals will remain supportive of external debt (EXD) spreads over the coming months. The risk is if authorities decide to tap again an existing bond issuance as external financing needs remain large.”