Market analysis: A golden summer for GCC debt issuance
The pace and scale of debt issuance in the GCC this year shows few signs of slowing. In fact, the months ahead promise more, not fewer, debt sales as investor appetite for fixed income remains strong.
The second quarter of the year featured some substantial debt issuance. Highlights include Qatar’s US$9 billion debt offering – the second-largest in GCC history – Abu Dhabi’s $5bn dual-tranche transaction and Oman’s $2.5bn similar sale of five-year and 10-year bonds. On the corporate side, Abu Dhabi National Energy Company, or Taqa, finalised the sale of $500 million in senior notes, and Commercial Bank of Qatar issued a $750m five-year bond.
The reasons for this surge in activity are three-fold.
The first, and most significant supporting factor, is the cost of funding. The rate of interest (cost) that a borrower will pay to obtain money by issuing a bond is currently low, and potentially moving lower. This kind of environment makes it extremely attractive for corporates, and sovereigns for that matter, to raise money from debt markets.
The second reason for the spike in issuance is the need for funding. With oil prices travelling below $50per barrel, many GCC governments need to plug significant budget deficits. This need for funding is not contained to sovereigns. Many big companies in the GCC are under pressure to find new avenues of financing to maintain capital expenditure programmes.
The third element that is fuelling debt issuance is risk sentiment. Bonds and sukuk are often considered a safer component of an investment portfolio, providing stability and certainty during periods of uncertainty and volatility. The recent decision of the United Kingdom to leave the European Union has highlighted the low-beta characteristics of GCC fixed income markets. Brexit has proved a volatile event for financial markets to digest, and the uncertainty created will linger for some time as investors work through the short-term and long-term implications of the event. Such an environment is conducive for fixed income demand.
In the GCC, perhaps the one country that stands out in terms of debt issuance potential is Saudi Arabia. News reports suggest the kingdom is considering a jumbo sovereign bond offering to help fuel its ambitious National Transformation Program.
While qualified foreign investors can now buy and own Saudi shares, last month [June] the Capital Market Authority said it plans to let foreign institutional investors buy exchange-listed debt instruments. Such a move is to be applauded. Not only will this help to develop the kingdom’s debt markets by introducing a more sophisticated type of investor, but there are also positive ripple effects for GCC fixed income as well as more global investors take a closer, and longer term, look at the region.
But much like any market, there are risks to the immediate outlook.
Politics is a potential wrinkle that could weaken the investment case for fixed income. The recent failed coup attempt in Turkey highlights the fragile nature of many of the developed and developing world’s political systems. Add to this mix the ongoing threat of terror attacks, like those in France and Iraq, and it is little wonder that investors and financial markets in general are growing increasingly concerned. These risks are global in nature and not restricted to the GCC.
GCC debt markets are particularly well-positioned and attractively priced. Most of the region’s debt is still rated investment-grade and is largely denominated in US dollars. Encouragingly, the region continues to undergo a significant transformation of its capital markets. With this in mind, we think GCC fixed income will continue to serve investors well, even as the outlook for other pockets of the global economy vacillates in the months ahead.
Mohieddine Kronfol is the chief investment officer of global sukuk and Mena fixed income at Franklin Templeton Investments ME.
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Published: July 27, 2016 04:00 AM