Sovereigns to dominate new issuances in the GCC: Arqaam Capital

Wednesday, May 17, 2017

Sovereign issues will continue to dominate new issuances in the Gulf Cooperation Council (GCC) as governments in the region grapple to live with the "new normal" of low oil prices and strive to cater for the strong infrastructure spending needs according to Abdul Kadir Hussain, Managing Director, Fixed Income Asset Management at Arqaam Capital, the specialist emerging markets investment bank.

"Even in the corporate sector, many of the issuers are Government-Related Entities. We believe that stand-alone and entirely private corporates will continue to account for a small portion of issuance in the region primarily due to a traditional reliance on banks for funding on the one hand, and because these type of issuers normally don't have the financing needs that would entail a benchmark sized public issuance on the other hand. They are generally too small to issue in the USD denominated public debt markets," Mr. Hussain said on the sidelines of Bonds, Loans & Sukuk Middle East conference, which kicked off today in Dubai.

"Sovereign issues are expected to be moderate for the rest of the year. Oman appears to have completed its financing for the year with the latest loan from Chinese banks. Saudi Arabia may do another conventional issue in the third or fourth quarter.  We think Abu Dhabi and Qatar will only be opportunistic issuers." Mr. Hussain added

"So far the pace of issuance is significantly ahead of last year.  2017 Year-to-date issuance is $48 billion compared to $16billion for the same period in 2016. However, last year's issuance was more back-end loaded with close to $50bn being issued towards the end of the year. We expect issuance for the entire year to be 5-10% higher than last year's $70billion."

Commenting on international investors' strong appetite for GCC debt, Mr. Hussain said: "GCC issuers typically have stable credit profiles, an excellent record of debt repayment and are becoming a bigger part of global emerging markets bond indices. As such, global investors' interest is strong. However, international investors always look at options from a valuation perspective. Whenever GCC bonds have shown value versus other regions investors have jumped in aggressively. Currently, we feel there is value in certain issues and sectors but investors need to be quite discerning."

"The JPM GCC Index has already returned over 3% Year-to-date. We expect the second half returns to be more subdued and expect annual returns in the 4.5-5% range." He said

International developments will continue to have a big impact on GCC issuance. "Given the fact that local currency debt markets are either non-existent or not very deep and liquid in the GCC, International factors have a huge impact on GCC issuance. Factors like US interest rates, oil prices, geopolitics, global liquidity, among others, do determine what kind of reception regional investors will get in the global markets. Currently the environment is quite supportive as seen in the performance of most regional new issues. But should a back-up in rates or a change in FED policy regarding its Balance Sheet happen, things could change quickly." Mr. Hussain explained

Commenting on the Sukuk market outlook, Mr. Abdul Kadir Hussain said: "the Saudi $9bn Sukuk deal has made 2017 a bumper year for new sukuk deals. In fact for the GCC, 2017 year-to-date issuance is already ahead of the total 2016 issuance. Total global Sukuk issuance last year was around $41.8bn, while we are already over $23billion year-to-date. We expect total year issuance to be more than 10% in excess of 2016." Mr. Hussain concluded.