GCC issuers are likely to continue tapping debt markets in 2018 with similar amount of gusto as banks and corporations that need to refinance existing debt take the baton from sovereigns who may lessen the pace of purchases following a rebound in the price of oil.
Even though interest rates are rising, they are still at historically low levels and that may prompt issuers of all colours to lock in good rates ahead of a series of expected rate hikes by the Federal Reserve in 2018, market participants said. GCC nations with the exception of Kuwait peg their currencies to the US dollar and follow the US Federal Reserve's monetary policy.
"I expect the greatest uptick in issuance to come from corporate and financial names," said Andy Cairns, head of global corporate finance at First Abu Dhabi Bank.
"There is approximately US$30 billion of bond maturities during 2018 which I expect to be refinanced as issuers lock-in what are historically very attractive borrowing costs ahead of 2018's anticipated rise in interest rates."
Market participants said they expected GCC bonds issuance, which includes sukuk or Islamic bonds, to range between $70bn to $90bn in 2018. GCC bond sales reached a new record of $85bn in 2017 following a bumper 2016, bolstered by governments seeking to raise funds amid dwindling revenues from oil, according to Bloomberg. Sovereigns made up more than half of bond sales in 2017, up from 12 per cent of the total in 2015.
As in previous years, most of those sales are likely to be conventional bonds but sukuk will continue to make up a share of issuances, said Abdul Kadir Hussain, head of fixed income asset management at Arqaam Capital, a Dubai-based investment bank.
"I think bonds will dominate because of the larger size of the market," he said. "But you will see sukuk issuance when issuers want to diversify the investor base."
Regional governments have been selling international bonds and sukuk, in the case of Saudi Arabia for the first time, at a more accelerated pace in recent years in a bid to plug holes in their budgets caused by lower oil prices.
Governments in the oil-rich Arabian Gulf had not tapped the bond market in any significant way until 2016. Most countries in the region had maintained budget surpluses before the crash in the price of oil that began in the summer of 2014 and which led to more than a 60 per cent price plunge.
That drop in the value of crude oil, the lifeline for many countries in the region, changed the equation, with the result that 2016 was a record year for regional bond issues, with over $60bn worth of fixed income sold.
Of those sales in 2016, Saudi Arabia sold $17.5bn worth of bonds in its first international issue and Qatar raised $9bn.
Even though the US Federal Reserve is forecast to raise rates three times in 2018, following a 25-basis point increase in December, analysts said that is unlikely to deter sovereigns from tapping the debt market.
"GCC sovereigns are likely to continue to tap capital markets in the coming year," said Anita Yadav, Dubai-based head of fixed income research at Emirates NBD.
"Although oil prices have risen above $60 a barrel, government budgets in the region are still expected to remain in deficit particularly for Saudi Arabia, Bahrain and Oman. These deficits are likely to be funded by capital market debt."