Fitch Ratings-London/Dubai-01 November 2016: Saudi Arabia, Abu Dhabi and Qatar's international bond issues of USD17.5bn, USD5bn and USD9bn, respectively, create a pricing benchmark that will support the broader growth of capital markets in the region, Fitch Ratings says. The lack of a sovereign yield curve has been one of several factors holding back corporate bond issuance in the region. But these dynamics are starting to change, and corporate issuance should gradually start to take off in 2017.
Given the shift in oil prices and our expectation that they will only recover to around USD65 a barrel in the long-term, we believe sovereign issuance from Gulf Cooperation Council members will become a more regular feature of these markets. This is critical because the yield on sovereign debt creates a pricing benchmark from which all other debt instruments in the same market can be priced.
Robust liquidity and strong lending appetite at the region's banks also has been a factor in the slow development of local corporate bond issuance. Bank financing has been easier, quicker and cheaper than tapping capital markets, especially given the lack of a track record of issuance. Now, lower oil prices have reduced banks' liquidity and therefore their ability and willingness to lend. This may create a large funding gap for corporates. Even when corporates can borrow from banks, the pricing difference between the bond and bank markets may narrow.
New regulatory regimes will also help standardise bond issuance, which should help speed up the process and reduce costs. The Saudi Capital Market Authority's reform of the corporate debt market has included measures to make regulatory approval of debt products easier. Kuwait's Capital Markets Authority announced a broad sukuk framework in November 2015 and Oman updated its sukuk regulation. The central bank of the UAE proposed creating a Higher Sharia Authority to provide unified supervision and guidelines on Islamic finance-related matters.
The biggest remaining roadblocks to corporate issuance are therefore likely to be the development of debt management expertise and a change in the corporate culture to increase financial and management transparency. The region's biggest corporates should be able to adjust relatively quickly and are likely to drive a gradual increase in corporate issuance next year.
But second-tier GCC companies, while easily big enough to tap capital markets, are often family owned and publish relatively little financial information. It could take considerably longer for many of these companies to develop the level of transparency demanded by capital markets investors.
We believe GCC corporates are more likely to issue sukuk than bonds (or a mixture of both rather than only bonds) in order to attract a wider local and regional investor base including Islamic investors. In addition, some corporates are limited to only sharia-compliant borrowing by their own rules or by their desire to be included in Islamic investment funds and indexes.
Contact:
Bashar Al Natoor
Global Head of Islamic Finance
+971 4 424 1242
Al Thuraya Tower 1
Office 1805
Dubai Media City
© Press Release 2016
