Moody’s expects GCC sovereign debt issuance to fall 16.5% this year

Strong investor global demand, low global interest rates and recovering oil prices bolstered issuance last year, with Saudi Arabia’s $17.5 billion sale in October the biggest ever for an emerging market nation.

GCC international sovereign debt issuance is forecast to decline by 16.5 per cent this year from last year’s record sales as fiscal deficits narrow, but higher interest rates in the US and oil price gyrations could affect the outlook, Moody’s rating agency said on Tuesday.

Sovereign debt issuance is projected to decline to US$32.5 billion this year from $38.9bn last year because aggregate fiscal deficit will narrow to 6.4 per cent of GDP from 8.9 per cent of GDP, said Mathias Angonin, a sovereign analyst at Moody’s.

The $32.5bn figure will represent 21 per cent of aggregate gross financing requirements for this year.

“Reliance on Eurobonds for deficit financing will increase going forward because the governments want to prevent any squeeze in private sector credit growth. If they do issue domestically, that could have a negative impact on domestic liquidity,” said Mr Angonin. “Domestic issuance will continue, but it will constitute a lower proportion of the overall funding mix for fiscal deficits.”

Strong investor global demand, low global interest rates and recovering oil prices bolstered issuance last year, with Saudi Arabia’s $17.5bn sale in October the biggest ever for an emerging market nation.

The kingdom is expected to be the biggest issuer this year, with $12.5bn worth of bond sales.

Kuwait, which issued this week an $8bn international bond, and Qatar will be the most dependent on Eurobond issuances for funding this year.

Mr Angonin expects sukuk issuances in the future from GCC sovereigns, which sold mostly conventional bonds last year.

US interest rates will have a direct impact on sovereign issuances since all Gulf countries except Kuwait peg their currencies to the dollar.

“For the moment, the impact [of US interest rates] was really mild,” said Mr Angonin. “Going down the road, it will mean lower liquidity accessibility to the private sector or higher borrowing costs for private sector but also for the governments.” He said this could weaken the debt affordability for GCC sovereigns, especially those most indebted – Bahrain and Qatar.

S&P Global Ratings said last month that Mena sovereign borrowing is set to decline by 20 per cent to $136bn following record debt issuances of $170bn last year.

With regards to financial institutions, they are expected to have stable issuances for bonds, with the UAE playing a prominent role in the field of capital-boosting bonds to comply with Basel III banking standards.

“I think in the UAE, the implementation of Basel III new rules, which increased the requirement for core capital and the Tier 1 in general, will lead to some new issuances but in other countries where credit growth will be relatively low such as Saudi Arabia or Bahrain we don’t expect a lot of issuances,” said Olivier Panis, a banking analyst at Moody’s.

GCC banks as a whole will experience credit growth of about 6 per cent, a similar level to last year’s and profitability is expected to remain stable.

“Compared to last year, we think that the stability [in net profit] will come from net interest margins that remain relatively stable,” Mr Panis said.

He said the cost of funding pressure last year will moderate this year and at the same time interest rate increases in the US will have a direct impact in the region since the currencies are pegged. “Therefore we see broadly it will be positive for the margins of the banks,” said Mr Panis.

“That will be moderated by two things – slower credit growth … and remaining pressures on asset quality, which means provisioning costs will likely increase.”

Provisioning costs represent 15 to 30 per cent of pre-provisioning income in the GCC but it is expected to remain below 30 per cent, he said.

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