Markets analysis: Debt is down and investment is up

In Dubai, high-profile firms made significant progress in dealing with their debt overhangs in the past month.

Positive economic news from the UAE and Saudi Arabia will help to boost investor interest in the GCC region. Reuters

The region’s markets last month reflected generally upbeat economic and market news, including robust purchasing managers index data for Saudi Arabia and the UAE.

The Saudi authorities provided further details on the planned opening of the Tadawul stock market next year. As expected, plans for some notable restrictions on foreign investment were announced. In spite of these restrictions – which may eventually be loosened somewhat – Saudi assets continued to be buoyed by the mere prospect of the market opening.

In Dubai, high-profile firms made significant progress in dealing with their debt overhangs. Dubai World, the state-owned company at the centre of the emirate’s 2009 financial crisis, presented a proposal to its main creditors to extend the deadline for repayment of US$10.3 billion in debts by four years to 2022 in return for repaying ahead of schedule a further $4.4bn of loans due in September next year.

Also in Dubai, the state-backed developer Nakheel confirmed the early repayment of its entire $2.15bn bank debt nearly four years before the final loan instalment due in March 2018. Meanwhile, Dubai Duty Free attempted to re-price a $1.75bn syndicated loan for the second time in a little more than a year – an initiative considered a fresh sign of banks’ willingness to lend cheaply to the emirate.

On the regulatory front, initiatives were unveiled to simplify and improve the regulatory structure governing the Dubai International Financial Centre in a bid to garner more international investment flows.

Institutional interest in Qatar continued to be boosted by plans to open up the equity market more to investors from other GCC countries and from further afield, while in Bahrain the prime minister ordered that public spending should be slashed in a bid to reduce debt. Even Egyptian financial markets benefited from speculation of a fresh $10bn loan package from GCC countries and a smaller amount from IMF. On Wednesday, Egypt finally reached a deal with the UAE to buy 65 per cent of its oil imports for a year.

We would expect the positive economic news from Saudi Arabia and the UAE to continue to boost investor interest in the GCC region as a whole. The ongoing Emaar Malls initial public offering on the Dubai Financial Market is a significant event in the short term, and could set the template for further capital market development. We believe that this operation, along with Dubai-based companies making significant progress in restructuring their debt burdens and Dubai banks cutting their non-performing loans, indicates that market sentiment towards GCC countries remains bullish. Combined with consistently upbeat economic data, this bullish sentiment could, in our view, continue to support financial assets in the region.

However, we acknowledge that fixed-income markets have racked up important gains this year already. The widening in bond spreads early last month at the same time as large-scale weekly outflows from US high-yield funds indicated that valuations are looking stretched to a number of market participants. Credit markets (including the market for high-yield bonds) recovered somewhat from their early-August swoon as they remained broadly supported by low inflation, underlying improvement in the US economy, default rates that remain well below the long-term historical average and strong institutional demand.

Nevertheless, one needs to be prepared for a potential surge in volatility in a number of high-performing areas of the fixed-income market.

Mohieddine Kronfol is the chief investment officer for fixed income and global sukuk at Franklin Templeton Investments (ME)

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