Sovereign Bond Caravan Lopes Along

Sovereigns continue to lead debt issuance in the Gulf Cooperation Council countries, with further major issuances planned for this year, as countries look to plug deficits.

Countries in the Middle East are continuing to rely heavily on debt financing in 2017 and are issuing large dollar bond issues in international markets. Egypt had a successful $4 billion issue in January, and Oman sold $5 billion of international bonds in March. Both issues were double the size originally planned, due to strong investor demand.

Kuwait is planning to issue as much as $10 billion in its first-ever dollar-denominated bonds. Saudi Arabia has sent banks a request for proposals for a large US-dollar sukuk (Islamic bond) issue.

None of this year’s sovereign debt issues in the region are likely to surpass the record $17.5 billion offering by Riyadh last October. But the total borrowing for Gulf Cooperation Council (GCC) countries could equal, if not rival, the $72 billion of loans, sukuk and bonds that came to market in 2016 amid low oil prices and pinched government revenues, bankers say.

“We expect about the same amount of issuance as last year,” says Abdul Kadir Hussain, head of fixed income asset management at Arqaam Capital in Dubai. “The key issue will be Kuwait and potentially a follow-on issue from Saudi Arabia.” Currently, GCC bonds offer a slight pick up in yields compared with similarly rated emerging market global bonds, Hussain says. “Even at lower oil prices, most GCC economies maintain very robust credit profiles,” he states. “In addition, despite higher recent issuance, GCC issues are still relatively rare and provide good risk diversification.” Arqaam Capital expects the broad market to provide a return of 4% to 5% this year.

Sovereigns will be the big-ticket issuers; but corporations and banks, as well as government-related entities, will take advantage of established sovereign yield curves to issue bonds, Hussain says. “We are still not seeing as many corporates as we would like in the market,” he says. “Turkey, which has been a frequent issuer in the past, has been quiet for a while.”

M.R. Raghu, senior vice president of research at Kuwait Financial Center (Markaz), says the funding requirements of GCC issuers are high. The International Monetary Fund estimates that the Gulf countries will run a collective deficit of about $100 billion in 2017, as against $126 billion last year.

Hussain, Arqaam Capital: Despite higher recent issuance, GCC issues are still relatively rare and provide good risk diversification.


Most GCC countries have investment-grade ratings, despite a series of downgrades, Raghu says. Last year, GCC sovereign bonds returned more than 6%, largely driven by the strong performance of Bahrain sovereigns. “In 2017, rising US interest rates might result in higher yields and lower returns due to lower capital values,” Raghu says. Markaz forecasts that GCC countries will issue about $45 billion in the international markets this year.

Jason Tuvey, Middle East economist at Capital Economics in London, says, “Kuwait’s strong balance sheet means that it should be able to sell debt at low yields compared with its neighbors, while Oman’s bond sale will help to ease fears of a devaluation of the rial.” Oman and Bahrain, the most vulnerable of the GCC countries to low oil prices, will also receive financial support from the rest of the Gulf, he says.

“The proceeds from international bond sales are counted as a capital inflow, and so will help to finance current account deficits and stem the bleed of foreign exchange reserves,” Tuvey says. Meanwhile, investors have displayed an extraordinary appetite for bonds from the region, where many of the larger countries have very little debt on their books.

Saudi Arabia’s $17.5 billion issue last October, the largest ever by an emerging market country, attracted $67 billion in bids. Egypt’s $4 billion sale in January drew about $13.5 billion of orders. The success of these recent bond sales has helped to restore the confidence of investors in the region, as reflected in rising stock prices. With its January bond sale, Egypt should comfortably meet its external financing needs for the rest of the year, Tuvey says.

In the financial sector, Dubai Islamic Bank (DIB), the UAE’s largest shariah-compliant lender, listed a $1 billion sukuk on Nasdaq Dubai in February. “This deal represents the largest senior sukuk issued by a financial institution globally,” Adnan Chilwan, group CEO of DIB, said in a statement. “The overwhelming demand from investors has enabled us to price inside DIB’s current yield curve.”

The dollar-denominated issue bolstered Dubai’s position as the largest venue for sukuk listings in the world, with a total of $47.8 billion as of February 15, 2017, according to Nasdaq Dubai. The DIB issue carries a dual listing on the Irish Stock Exchange.

DIB conducted investor meetings in Asia last year and a road show in London in early February. “Over the recent past, we have continuously engaged with the global investor community, adopting an extremely transparent and open approach to imparting updated information to the market,” Chilwan says.

Raghu, Markaz: Rising US interest rates might result in higher yields and lower returns due to lower capital values.


Meanwhile, the record Saudi bond issue last October enabled the government to pay overdue bills to contractors, which led to significant loan repayments to banks, according to Moody’s Investors Service. A report by Moody’s analysts based in the Dubai International Financial Centre, said: “Although we expect liquidity pressures to remain moderate over the next 12 to 18 months against the backdrop of low credit growth, which we expect at around 3%, deposit growth will remain challenging.”

Moody’s says it views the Saudi government’s recent decision to suspend domestic bond issues as positive. Liquidity pressures likely will ease this year, compared with 2016, primarily as a result of subdued credit growth. This will, however, reduce banks’ profits, Moody’s says

GCC debt issuance “is expected to remain robust in 2017, with issuers seeking to take advantage of the still favorable global rates environment supported by their improving fiscal sustainability,” say economists at National Bank of Kuwait (NBK) in a January report.

“Weak fiscal pictures will continue to push government-related entities to debt markets, with Omani and UAE state-owned firms expected to lead the way,” NBK says. The UAE has already tapped into international debt markets to plug its budget gap. Last April, Abu Dhabi sold $5 billion in sovereign bonds, its first issuance since 2009.

So far, UAE issuance has been at the level of individual emirates rather than at the federal level. This is about to change, NBK says, with the UAE in the process of finalizing a law allowing the federal government to issue bonds.