Rise in GCC sovereign debt sales likely with pending US rates hike

Arabian Gulf issuers are forecast to issue more debt even as interest rates rise.

Regional debt sales are set to pick up as corporates and governments seek to lock in borrowing costs ahead of a rise in interest rates.

That trend is likely to continue this year as issuers are encouraged to the market ahead of expected rate increases by the US Federal Reserve, analysts say.

An abundance of willing buyers, especially pension funds and other long-term institutional investors have prompted issuers such as the Kuwaiti government to raise US$8 billion this month.

“We feel that it is still a good time for Gulf issuers to raise funds from the bond markets,” said Mohammed Al Hashemi, executive director of Invest AD, an Abu Dhabi-based asset manager. “Different categories of bond investors such as asset managers, pension funds, sovereign funds, regional bank treasuries and private banks still have access to ample liquidity and are looking to deploy capital.

“In the absence of any significant pick-up in loan growth, regional treasury desks are looking to deploy liquidity in regional bonds across various duration levels as they strive to generate higher yields and higher net interest margins for the bank as a whole.”

Mr Al Hashemi said that despite the recent rate hike, a 25 basis point increase, that spreads remained attractive and that issuers would be likely to take advantage. Even though the Federal Reserve raised rates this month, it has been only for the second time since the financial crisis of 2008. Janet Yellen, the chairwoman of the Fed, indicated that the lender of last resort would still be accommodative with rates and would not rush to raise them quickly.

Oman’s government raised $5 billion in international bonds this month while it was reported by Bloomberg News last week that Ezdan Holding Group, a Qatari company, plans to sell 5-year sukuk, according to bankers with knowledge of the plan. Sjoerd Leenart, the chief executive of the Middle East, Turkey and Africa for JP Morgan, told the National last month that there was continuing momentum in bond sales and that it was working on a number of international bond offerings. JP Morgan was the lead manager on those sales from Saudi Arabia, Abu Dhabi and Qatar last year.

Some Gulf issuers have only come to the market over the past year because of necessity amid a crash in the oil prices.

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.

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, during which oil shed more than 70 per cent of its value.

That drop in the value of crude oil, the lifeline for many countries in the region, changed the equation and 2016 was a record year for bond issues in the region, with over $60bn 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. Of those sales last year, Saudi Arabia sold $17.5bn worth of bonds in its first international sale and Qatar sold $9bn.

Still, sovereign issuers may not be selling as much debt as the record amount that they sold last year, according to analysts that watch these trends closely.

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

“We project that the 13 Mena sovereigns that we rate will borrow an equivalent of $136bn from long-term commercial sources in 2017,” said Trevor Cullinan, a primary credit analyst based in Dubai for S&P.

“This represents a 20 per cent decline of $34bn in long-term commercial debt issuance.”

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