The Danish investment bank Saxo Bank said it sees budding appetite for Arabian Gulf fixed income amid a flurry of sales as western pension funds and institutions seek diversification, especially from low-yielding bonds.
Governments in the oil-rich Arabian Gulf had not typically tapped the bond market in any significant way until last year because most of the countries had maintained budget surpluses before the crash in the price of oil that began in the summer of 2014.
But all that has changed and 2016 was a record year for bond issues in the region, with over US$60 billion worth of fixed income sold. That has caused excitement among long-term investors who are seeking to diversify their bond portfolios from a relatively stable part of the world that offers attractive yields at the moment.
“The reason I think that when they start selling bonds again in a couple of months, the investor interest will be huge because the correlation towards the US and European markets is a different one, it’s lower,” said Simon Fasdal, head of fixed income at Saxo Bank.
“I am quite certain that there will be a lot of demand for the bonds. When the Saudi issuance came, there was fear that they would be able to sell such a massive issuance, but the demand was overwhelming and this year the demand will be there.”
Regional governments have been selling international bonds and sukuk, in the case of Saudi Arabia for the first time, in a bid to plug holes in their budgets caused by lower oil prices. The price of oil shed as much as 70 per cent of its value in the crash that began in the summer of 2014 but has since partially recovered.
The UAE accounted for $14.4bn issued in the second quarter of last year, Qatar $9bn and Oman $5bn, according to a report in September from the Bank for International Settlements.
In April 2016, Abu Dhabi’s Department of Finance sold a $2.5bn tranche of five-year bonds yielding 2.125 per cent and another $2.5bn tranche of 10-year bonds yielding 3.125 per cent. Qatar and Oman also sold bonds last year.
The pièce de résistance came in October when Saudi Arabia came to the market with a $17.5bn debut dollar international bond sale. The debt sale was split into tranches of five, 10 and 30-year bonds. The country sold $5.5bn of the five-year tranche, $5.5bn of the 10-year and $6.5bn of the 30-year, with total demand for the bonds amounting to $67bn.
The Saudi budget deficit widened to 14.8 per cent of GDP in 2015 from 2.3 per cent in 2014 amid the collapse of oil prices.
JP Morgan was the lead manager on those sales from Saudi Arabia, Abu Dhabi and Qatar.
Sjoerd Leenart, the chief executive of the Middle East, Turkey and Africa for JP Morgan, told The National last week that there was continuing momentum in bond sales and that it was working on a number of international bond offerings.
Global investors who have few pockets of value left in front are sure to take notice, says Mr. Fasdal. Over the past years, these investors have been snapping up emerging market debt amid low interest rates in the US and $8 trillion of negative yielding bonds in Europe and Japan.
mkassem@thenational.ae
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