Arabian Gulf state bond issuances in 2018 are likely to surpass the $49.5 billion (Dh181.67bn) raised through the sovereign deals last year, as the hydrocarbon-rich countries continue to diversify their funding sources amid softer crude prices.
“This robust performance by the GCC primary markets stands out as particularly strong when compared to the broader emerging market trend, where aggregate issuance is lagging significantly behind 2017 levels,” Philipp Good, chief executive at Zurich-based asset manager, Fisch Asset Management, said.
The broader emerging markets have faced considerable headwinds this year, dragged down by higher US interest rates, weaker local currencies, and intensified threats to free trade that have affected debt issuances. “Nonetheless, we do expect performance and inflows across emerging markets to improve meaningfully in the second half of the year, and we expect the GCC to continue issuing at a brisk pace,” Mr Good said in a statement on Wednesday.
Governments in the GCC, a region which accounts for about a third of the world’s proven oil reserves, are still heavily dependent on the sale of hydrocarbons for revenues. The three-year oil price slump that began in the mid-2014, which has retrenched somewhat, forced governments to raise funds through capital market deals in the last two years in a bid to plug budget deficits and sustain economic growth.
Saudi Arabia and the UAE, the region’s two biggest economies, accounted for the bulk of the issuances out of the total $49.5bn raised in 2017. The kingdom, the world’s top crude exporter, tapped the capital markets for $21.5bn and Abu Dhabi raised $10bn. Kuwait secured $8bn, while Oman and Bahrain raised $7 and $3bn, respectively.
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Saudi Arabia, this year has again sold a big-ticket deal, raising $11bn through a multi-tranche bond in April. Oman and Bahrain are the other two issuers in the first half, securing $6.5bn and $1bn through bond transactions, respectively, Fisch in the statement.
The kingdom and Abu Dhabi, which was the second-biggest issuer in 2017, are both expected to revisit the market with $5bn deals each in the second half of this year, according to the asset manager. Dubai, the tourism and commercial hub of the Middle East, is also likely to raise $1.5bn, while Kuwait may tap the bond market with a $8bn deal in the second half. Both Oman and Bahrain are also likely to further raise $1 and $2bn, respectively in the last six months of 2018, taking the total issuances to $53bn, Fisch added.
The GCC’s potential inclusion in the JP Morgan Emerging Markets Bond Index, with the official phase-in expected to commence in early 2019, will also positively impact the demand for paper sold by the Arabian Gulf sovereigns. The contemplated combined index weighting for the region may be more than 12 per cent, it noted.
The inclusion into JP Morgan’s widely tracked government bond gauge could lead to $30bn of inflows and could lower borrowing costs for the individual states, Bank of America Merrill Lynch said in August.
“To put the significance of this potential weighting into context, the combined weighting of index heavyweights China, Russia, and Brazil is currently just over 11 per cent,” Mr Good said. “This index inclusion will have a very positive impact on the investment demand dynamic for the GCC, as index-based funds will allocate more capital to the region – a process that has already begun, as confirmed by the recent positive price action of the GCC’s sovereign bonds.”
