Analysis: Good news in the GCC markets

A market pullback in the coming weeks would be highly salutary for risk assets in the Arabian Gulf region.

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News from GCC countries was mostly upbeat last month. Qatar and the UAE were promoted by MSCI to emerging-market status. Qatar also decided to raise the ceiling on foreign ownership of Qatari companies, while Dubai liberalised rules for equity listings.

Economic indicators for the UAE remained very strong, with the purchasing managers’ index (PMI) rising from 57 in April to 58.3 last month, the highest level recorded in the country. Saudi Arabia also recorded some of the highest PMI readings in the world.

In keeping with large-scale infrastructure spending in other areas, a multibillion-dollar programme of spending on education was announced in Saudi Arabia.

Also last month, the deputy electricity minister announced that Saudi Arabia needed to spend US$213bn over the next 10 years to meet soaring domestic demand for water and electricity.

Because of economic growth in Kuwait lagging its neighbours for some time, the IMF expressed concerns about increases in wage bills for the public sector, where 90 per cent of Kuwaitis are employed. According to the IMF, if the current rate of public-sector wage and subsidy increases is maintained, Kuwait will start recording budget deficits by 2017. To avoid the budget deficits, the IMF urged Kuwait to diversify the economy away from subsidised jobs.

Presidential elections in Egypt resulted in the expected victory of Abdel Fattah El Sisi. However, voter turnout was much lower than expected, leaving markets anxious to see how far Mr El Sisi would be able to push economic and social reforms. During last month, Egypt’s finance ministry announced that it expected the budget deficit to be about 13 per cent of GDP this year alongside GDP growth of 3.0 per cent to 3.5 per cent. As part of its efforts to raise revenue and broaden the tax base, the government announced plans to impose a 10 per cent capital gains tax, denting investment sentiment in Egypt towards the end of the month.

Ratings Changes

Moody’s affirmed the A3 long-term issuer ratings of Qatar International Islamic Bank and changed its outlook to positive from stable to reflect the expansion of the bank’s Islamic franchise, particularly in the retail segment, as well as recent improvements in asset-quality metrics. Moody’s also said QIIB’s rating reflected its strong capitalisation, liquidity and funding profile.

Standard & Poor’s affirmed Morocco’s sovereign ratings at BBB-/A-3 and raised its outlook from negative to stable last month. S&P emphasised Morocco’s healthy economic growth prospects, moderate debt burden and relative economic and social stability, while justifying the rise in the outlook by pointing to Morroco’s efforts to reduce budget- and current-account deficits through reforms to improve growth, competitiveness and productivity.

Linked to Morocco’s outlook revision, S&P also revised the Casablanca-based phosphate producer OCP’s BBB- credit rating outlook to stable from negative.

By contrast, S&P changed the outlook on its A/A-1 ratings of Ras Al Khaimah to negative from stable. S&P underlined RAK’s strong government balance sheet and indirect financial support from other members of the UAE, but also said it viewed the emirate’s underdeveloped government institutions and shortcomings in the provision of economic and demographic data as “ratings weaknesses”.

S&P affirmed Etisalat’s rating at AA- with a stable outlook from “under review for downgrade” and later assigned the same to the company’s global medium-term note programme. In an initial rating, Moody’s assigned an A2 to Riyadh-based Bank Al Bilad local and foreign currency deposit ratings with a stable outlook.

Issuance

Issuance seemed subdued in light of the strong performance of markets in general last month. Saudi Arabia’s Dar Al Arkan Real Estate Development launched a $400 million five-year sukuk at a profit rate of 6.75 per cent. Also last month, Investment Corporation of Dubai, which holds some of the emirate’s main assets, launched a $700m sukuk and a $300m conventional bond. The debt sale came on the heels of a $750m issue late in April by the Government of Dubai. The profit rate for the six-year sukuk mid-swaps is +160 basis points, while the spread on the 10-year conventional bond mid-swaps is +210 basis points.

Abu Dhabi Commercial Bank sold a five-year A$250m kangaroo bond in last month. The bond was priced at 165 basis points over the mid-swap level, in line with the guidance announced. The final pricing reflects a spread of 188 basis points over the benchmark Australian government bond.

In March, National Bank of Abu Dhabi issued an A$400m five-year bond, followed by an A$250m bond from FGB in the same month, while Emirates NBD, a Dubai bank, issued an A$400m five-year Kangaroo bond in the last week of April.

Market Outlook

The Middle East and North Africa, and particularly the GCC, economies and financial markets have positive prospects over the medium term. However, the somewhat indiscriminate run-up in risk assets in some countries, particularly the UAE, since the beginning of last year has resulted in rich valuations across a number of companies and sectors where liquidity has been deteriorating.

A market pullback in the coming weeks would be highly salutary for risk assets in the Arabian Gulf region and would not dim our belief in the potential for GCC bonds and sukuk. Whereas the growth outlook remains somewhat cloudy in many regions around the globe, visibility is much higher and brighter in GCC countries. Within the region, state finances continue to generate surpluses, infrastructure programs boost domestic economies, the IMF expects non-oil GDP growth to reach 5.7 per cent this year and capital market development continues to gather momentum.

Mohieddine Kronfol is the chief investment officer for fixed income and global sukuk at Franklin Templeton Investments Middle East

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