April was a positive month for bonds in the Middle East and North Africa, with the Citi Mena Broad Index returning 0.71 per cent over the month as news flow out of the region continued to be generally upbeat. However, they underperformed worldwide emerging market bonds.
Good news during the month included the IMF raising its 2014 forecast for GDP growth in the UAE and Qatar to 4.4 per cent and 5.9 per cent respectively, spurred by double-digit growth in construction, financials, property and business services as both countries continued to diversify their economies and invest heavily in infrastructure.
The IMF, however, lowered its growth forecast for Saudi Arabia from 4.4 per cent to 4.1 per cent as “Saudisation” led to the mass expulsion of immigrants and the authorities grappled with a serious Mers outbreak, which has killed more than 100 people since 2012. In Egypt, preparations continued for the May 26-27 presidential election, which the army chief Abdel Fattah El Sisi is expected to win. Another stimulus package was unveiled in an effort to hit a real growth target of 6 per cent for fiscal year 2015. Plans to increase electricity prices were also announced.
Favourable financing conditions and significant investor demand meant there was an April rebound in bond issuance in GCC countries. Among the most important deals was a US$750 million eight-year bond from Mubadala, the strategic investment vehicle of the Abu Dhabi Government, which was issued at 120 basis points over US treasuries. The order book for this issue came to $2.5 billion.
Abu Dhabi National Energy (Taqa) also came to market with an issue of the same size as Mubadala's, but with a 10-year maturity. The bond, priced at 3.875 per cent, will be used for general expenses and to repay part of the $1.2bn of Taqa bonds due to mature in September. In late April, the Dubai-based mall developer Majid Al Futtaim was able to price a $500m bond issue with a 10-year maturity at the tight end of revised guidance of 195-200 basis points over midswaps. The bond, which carried a coupon of 4.75 per cent, attracted an order book in excess of $2bn.
The month was also rich in sukuk issuance. Dubai issued its first 15-year sukuk at a profit rate of 5 per cent. The Government hopes that this unusually long tenor will pave the way for long-term debt sales by Dubai's state companies, according to the Department of Finance. This $750m issue attracted $2.3bn in investor demand. Also in Dubai, Damac Real Estate issued an inaugural $650m five-year sukuk at a profit rate of 4.97 per cent.
Saudi Electricity issued $2.5bn of sukuk in two tranches. The $1.5bn tranche had a maturity of 10 years and offered a yield of 4 per cent, while the second $1bn tranche had a maturity of 30 years and a yield of 5.5 per cent.
In the Kurdish region, Gulf Keystone priced a $250m five-year bond at 13 per cent and Genel Energy a $500m five-year bond at 7.5 per cent.
While global markets were relatively quiet last month, they may prove less lethargic in the coming weeks as data either confirms or negates hopes for a broad-based recovery in the global economy. With the US Federal Reserve’s tapering of its monthly asset purchases in full swing and with corporate margins largely perceived to have peaked, markets increasingly seem to be approaching an inflection point.
Nevertheless, our outlook for the global economic cycle is mostly positive and we note that the IMF is forecasting global growth of 3.6 per cent for this year, compared with a final outcome of 3 per cent for last year.
While cautious about an eventual rise in interest rates, we are not overly concerned about the effect should this rise result from an improvement in growth in the US, although there is potential for the more frothy parts of the credit markets to experience a pullback. The prospect of higher interest rates could strengthen the US dollar and thus increase the attractiveness of the GCC countries, where most currencies are tied to the dollar.
We remain convinced that the process of differentiating individual emerging and frontier markets from an indistinguishable whole could continue to benefit strong-growing GCC countries with strong finances and competitive growth rates.
Any increase in bond market volatility caused by rising interest rates could cause the GCC bond market, relatively uncorrelated to other bond markets, to perform relatively well. Issuance could also be encouraged by developing regulatory capital standards, which are encouraging several banks to issue hybrids. Exposure limitations, such as those placed by the UAE Central Bank, and updated capital rules could eventually drive more issuers to the market and away from the traditional use of bank loans.
We expect the exciting development story underpinning Mena bond markets to persist and, in combination with strong fundamentals, support relative performance in the near and medium term.
Mohieddine Kronfol is the chief investment officer for fixed income and global sukuk at Franklin Templeton Investments Middle East
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