Oil plunge should spur Gulf bond sales, says S&P

Gulf banks, which have traditionally provided most funding in the region, to become more cautious amid plummeting oil earnings. Shawn Baldwin / Bloomberg

The oil price rout is expected to spur debt sales next year to help US$640 billion in project spending across the Arabian Gulf says the regional chief of Standard & Poor’s.

New banking regulations and the expected opening of the Saudi stock market to foreign investors are also expected to provide a boost to debt markets.

Due to wobbly economic growth in Europe and Asia and an oil glut, Brent has shed about half of its value since June. That is likely to lead Gulf banks, which have traditionally provided most funding in the region, to become more cautious amid plummeting oil earnings, which account in some Gulf countries to more than 90 per cent of revenue.

“We are probably going to see some tightening of bank liquidity,” said Stuart Anderson, the managing director and regional head at S&P.

“One would imagine that will start feeding through into 2015. There is also increasing regulatory moves that will encourage more bond issuance, and that is related to Basel III and other measures implemented by various regional regulators and central banks.”

Gulf countries, some of which enjoy AA ratings, are forecast to spend $640bn on development projects through 2019, according to figures by the consultancy EC Harris. This sum is likely to be partly financed by Islamic bonds or sukuk and conventional bonds.

Central Banks around the region have been tightening bank rules as capital-boosting Basel III standards begin to be phased out over the coming years.

Some Gulf sovereigns are likely to tap the bond markets next year to finance fiscal deficits, which will occur due to the oil price crash. “There is nothing abnormal in introducing some minor degree of government borrowing, which would benefit the development of local debt markets and possibly help in the diversification of regional economies,” said Mr Anderson.

S&P has already lowered its long-term outlook for Saudi Arabia, Oman and Bahrain due to the falling price of crude. S&P expects government-related entities (GREs) to come to the market next year, although many of them shied away this year.

“There are still many names out there that have indicated they will come to the bond market. Some of the GREs and corporates have indicated this privately, but they are yet to tap the bond markets,’’ he said, declining to name any of them.

“There are also a number of projects out there which are completing 15 year anniversaries – some of them have 15 to 20 year tenors. Some of these projects are equally successful and it is very possible they will be refinanced through sukuk, and if not a sukuk, then through a conventional bond.”

Not all GREs, though, are eager to tap the bond market next year. Dubai Electricity and Water Authority, which has a $1bn bond maturing in April, plans to use its own resources and short-term loans to cover its expenses next year. Many GREs and corporates in the UAE did not tap the bond market this year because they refinanced debt more cheaply through banks, which are flush with cash. Although the UAE's Central Bank has capped the amount of bank lending to GREs to 100 per cent of capital, banks were given a five-year grace period to comply with the rules.

"Many of us would have expected the regulations to have logically led to some migration of bank lending to the bonds and sukuk market. But that doesn't seem to have happened yet," said Mr Anderson. S&P also expects sukuk issuance next year to continue to be robust as demand outstrips supply. Oman, the last Gulf state to introduce Islamic finance, is expected to go the market next year with a debut sukuk. Gulf authorities have been actively building bond markets for corporates to help expand funding sources away from bank lending, create financial hubs that would help diversify the oil-reliant economies and establish a bond-yield curve. The UAE's Securities and Commodities Authority has eased rules for bond and sukuk issuance by introducing a number of new measures.

The Saudi Arabian central bank has issued new rules for rating agencies that will be implemented starting next September. The rules include the requirement for a credit agency to have a presence in the country and have a minimum paid-up capital of 2m million riyals (Dh1.95m) or three months working capital – which ever is higher.

The Saudi central bank is also enforcing new lending rules, which limit lending to single borrowers to 25 per cent of a bank’s capital, a measure that will help to spur bond issuance in the country, said Mr Anderson.

Saudi Arabia’s stock market regulator, the Capital Market Authority, announced in July that it would open the market to foreign investors in the first half of next year, a boon for local and international investors.

“If you look at the Saudi market, the long-term potential for ratings is very positive. There are about 165 listed companies in Saudi Arabia and only 15 per cent of them have a rating from an agency.

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