The Arabian Gulf's fledgling debt markets are expected to benefit from a boost thanks to Dubai's Expo 2020 and the more than US$2 trillion in infrastructure projects planned in the region.
Gulf governments undertaking large projects are keen to diversify funding sources and lessen reliance on banks as economic recovery makes issuing costs cheaper, according to both Mohieddine Kronfol, chief fixed income and sukuk investment officer at Franklin Templeton and Michela Bariletti, European, Middle East and Africa project finance senior analyst at S&P.
The pace of issuances in the Gulf has accelerated since the financial crisis of 2008 but the size of the debt market still lags behind global peers in areas including deposit bases, while GDP and still has much room for growth, according to Mr Kronfol.
While the $82tn global debt market is more than a third larger than the value of the world’s stock markets, GCC markets have a combined value of more than twice the size of region’s $420.3 billion sukuk and bonds, according to Bloomberg data.
“Just to get in line with emerging markets, the bond markets can grow five times to be in line with them,” Mr Kronfol said. “Look at the GCC region GDP, it’s like $1.2tn. If you look at the amount of projects they want to finance, it’s 100 per cent of that.
“You can’t expect the banks alone to fund that.”
“If you want to achieve the ambitious targets that the governments have set for themselves, whether it’s Dubai becoming the capital of the Islamic economy or all the ambitious targets that you have, to see that happen you need to see the development of your bond markets.”
In Dubai alone, officials estimate staging the World Expo 2020 fair will require more than $8bn in further spending and would boost the economy by $23bn, equivalent to about 24.4 per cent of GDP, across 2015 to 2021. Bank of America Merrill Lynch says the event would likely translate into a two percentage points lift to GDP between 2020 and 2021.
Banks in the region are flush with cash and ready to help with funding but governments like that of Abu Dhabi undertaking large-scale projects are also selling more project bonds to get longer tenures of debt which they would not be able to get with lenders, Ms Bariletti of S&P said.
As well as having attractive yields, project bonds, a niche within the broader debt universe, have a lower default rate than corporate bonds, according to an S&P study.
From 1992-2012, the global annual default rate for project transactions was 1.5 per cent and compared corporate default rate of 1.8 per cent over the same time period, S&P said.
Sukuk issuances are likely to continue growing at a double-digit pace over the next year in the Gulf, according to S&P. The value of sukuk issuances in the Gulf grew 11 per cent to $14.8bn in the 12 months ending Sunday, S&P said in a report this week.
Already this year, there have been two major project bonds sold in the Gulf. Abu Dhabi’s Shuweihat 2 power and water plant, which is 54 per cent owned by Abu Dhabi National Energy sold a $825 million bond that matures in August 2036.
In Saudi Arabia, Sadara Chemical, a joint venture between Saudi Aramco and Dow Chemical, sold a 7.5 bn Saudi riyal (Dh7.34bn) project sukuk as part of funding a petrochemical project that will cost close to $20bn.
The Sadara sukuk was the second project finance sukuk sold in Saudi Arabia after Saudi Aramco Total Refining and Petrochemical a joint venture between Aramco and France’s Total, sold a 3.75 billion riyal issue in 2011.
“What makes project bond successful is ensuring transparency, providing good yield, and ultimately investors may look into this asset class if they know there is a pipeline of projects to come into the project bond market,’’ Ms Bariletti said.
“We recognise though that bank lending is still going to remain the most significant provider of project finance, especially in the GCC where banks remain liquid and well capitalised.”
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