GCC bond markets remain resilient despite coronavirus outbreak

Debt issuance from the region is estimated to reach $105bn this year, Franklin Templeton says

Dubai International Financial Centre aims to triple its size by 2024. Sarah Dea / The National

The bond market in the GCC remains resilient despite the coronavirus pandemic, with issuance from the region likely to top $100 billion (Dh367bn) this year, according to Franklin Templeton.

The fund manager, which at the beginning of this year forecast issuance by Gulf sovereign and corporates entities would hit $95bn this year, has revised its estimate higher to $105bn, Mohieddine Kronfol, chief investment officer for global sukuk and Mena fixed income, told a media conference call on Wednesday. Any local currency issuance, which stood at $40bn last year, would be in addition to foreign currency deals, he noted.

“[The] GCC bond markets have been resilient ... they have sold off only 60 per cent of the sell-off of emerging market debt and roughly 50 per cent of high-yield debt in recent weeks, so on a relative basis the asset class continues to do well,” Mr Kronfol said.

“We expect issuance to pick up significantly ... the recent transaction by Abu Dhabi, Qatar – today we are seeing Saudi Arabia – are proof that markets are accessible, pricing is reasonable and demand is plentiful.”

This region, he said, is increasingly becoming a very significant part of the emerging markets debt world. It accounts for more than 20 per cent of both sovereign and corporate emerging market indexes.

We think quasi-government [firms] and corporates will follow [sovereign issuers] soon,” he said.

The fund manager has repositioned its portfolio in the recent weeks, drawing on its cash reserves to take part in regional debt transactions.

“We see enormous opportunity to buy GCC debt. We started buying a couple of weeks ago and will continue to do so. The GCC continues to be a lower beta and high-quality region,” he said.

Franklin Templeton sees value in all sovereigns, including Bahrain and Oman – two of the gulf region’s smallest economies with very low fiscal buffers. It is not as bullish about the corporate sector, though, which is trading at “distressed levels” almost across the board.

“We have preference for sovereigns over corporates in this environment but in general the market will normalise in coming quarters and spreads will compress to deliver very strong returns,” Mr Kronfol said.

“We don’t think the dire outcomes reflected in these prices will materialise, but nonetheless we are revisiting and stress testing all of our models.”

Sovereigns, corporate issuers, financial institutions and quasi-government companies are looking to raise debt to take advantage of the low interest rate environment to shore up finances amid a plunge in oil prices. Central banks across the world have cut rates to encourage lending as the global economy slips into worst recession since the Great Depression of the1930s.

The outlook is worse than the 2008 financial crisis as the twin shocks of falling oil prices and the rapid spread of the coronavirus pandemic have upended global trade, forced lockdowns in most of Europe, Asia and North America and put millions of jobs at risk.

The outbreak has infected close to 2 million people across the globe, with fatalities nearing 127,000, according to Johns Hopkins University, which is tracking the disease. More than 494,000 have so far recovered.

Oil prices have fallen more than 50 per cent since the beginning of this year and at this level, there is “pain for everyone, and it is not sustainable”, Mr Kronfol said.

“While we are budgeting for a lower oil price for longer, we do expect to see a new oil price regime to emerge and think we could be back over $45 per barrel before year end. This obviously has implications for sovereigns in the region, specifically their fiscal balances and their funding needs," he said.