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.