Uptick in bond issues show GCC yields offer value

There were three bond issues of note in February from UAE banks.

Oil prices seemed to have stabilised by the end of February in reaction to the steep drop in the US rig count. Scott Olson / Getty Images / AFP
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After a slow start to the year, the pace of bond issuance in the GCC is gathering momentum, supporting plans for infrastructure development and prospects for non-oil economic growth across the region.

The demand for new issues also highlights the relative value of GCC bonds and sukuk compared to the ultra-low yields on offer in Europe, Japan and other regions and sectors of the fixed income market in the developed world.

There were three bond issues of note in February from UAE banks. National Bank of Abu Dhabi successfully launched a US$750 million five-year bond issue at 85 basis points over mid-swaps, followed by FGB’s $750m five-year issue. RAK Bank also announced it would raise a further $300m through a reopening of a bond maturing in June 2019.

Last month, the uncertainties over oil prices and the possibility that Saudi Arabia may begin running a fiscal deficit pushed the ratings agency Standard & Poor’s to change the outlook on Saudi Arabia’s sovereign rating from stable to negative. The kingdom’s foreign currency reserves rose by US$2 billion in January after four months of decline, but the decline in oil receipts began to affect foreign currency domestic liquidity.

In the UAE, the HSBC Purchasing Managers’ Index (PMI) reading for January reached a three-month high of 59.3, with the new orders component of the index particularly strong. The PMI data also indicated some stabilisation of inflation stemming from easing commodity prices and downwards pressure on rent prices. The progress made by Dubai World in negotiating a second restructuring of its debt had a positive effect on a number of UAE banks (including the Emirates’ largest bank, Dubai-based Emirates NBD), with bank loans to Dubai World reclassified as “performing” rather than “non-performing”.

In Kuwait, the government announced plans to spend 34 billion Kuwait dinars in investment projects over the next five years, up from 30bn dinars in the previous five-year plan. With the political climate somewhat less heated than in the past and the decision-making process more streamlined, there are hopes that the authorities might actually manage to spend a larger proportion of this money than in previous years.

By the end of February, oil prices seemed to have stabilised in reaction to the steep drop in the US rig count. Oil companies’ quarterly earnings reports have also helped by providing further information on spending cuts to deal with reduced revenues.

While these signs are encouraging, the risk of a saturation of storage facilities, forcing producers to release more output to the market, can put pressure on prices. Nevertheless, we think that is likely to be a transient weakness as demand picks up in tandem with improving prospects for developed world economies and as imbalances correct.

In the meantime, the non-oil sectors of GCC economies continue to grow strongly. Non-oil growth is being helped by large-scale government spending plans, which remain sustainable thanks to the large surpluses accumulated in the region in recent years.

Furthermore, we are encouraged by moves towards the reform of energy subsidies in the Mena region. These reforms are well advanced in the region’s oil importers, such as Morocco and Egypt, but we are now also seeing senior figures in the region’s major oil producers (including the governor of Saudi Arabia’s central bank) call for energy subsidy reform.

Meanwhile, the UAE continues to benefit from the diversification of its economic base, with Abu Dhabi stating that oil prices will not affect the UAE’s development.

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