GCC sovereign debt issuance, which witnessed another strong first half, is on track to exceed $50 billion in 2018, according to Fisch Asset Management.
In the first half, led by a multi-tranche sovereign bond transaction of Saudi Arabia, issuance reached $30 billion in the hard currency market, the Zurich-based asset manager said, predicting that full-year issuance could surpass 2017 levels.
In 2017, GCC sovereigns issued a record $50 billion in international debt, helping push total GCC issuance - public and private - over $100 billion for a second consecutive year. Despite this, reduced austerity and stronger commodity prices helped confidence return to the region, pushing benchmark yields lower, while international benchmark rates edged higher or were little changed, according to data from NBK Group.
Philipp Good, CEO at Fisch Asset Management, said the robust performance by the GCC primary markets stands out as particularly strong when compared to the broader emerging market trend, where aggregate issuance is lagging significantly behind 2017 levels. He said the emerging market segment has faced considerable headwinds this year, which have included higher US interest rates, weaker local currencies, and intensified threats to free trade.
"These factors, among many, have negatively impacted the performance of external debt products. These negative returns have, in turn, impaired inflows. Nonetheless, we do expect performance and inflows across emerging markets to improve meaningfully in the second half of the year, and we expect the GCC to continue issuing at a brisk pace," said Good.
Fisch is projecting total sovereign debt issuance in the GCC to hit $53 billion by year-end, led by Saudi Arabia's anticipated $16 billion. Abu Dhabi and Dubai have so far issued $5 billion and $1.5 billion bonds. Kuwait is expected to issue debt of $8 billion, Oman $7.5 billion and Bahrain $3 billion.
On the other hand, S&P Global Ratings has predicted that sovereign borrowing in the Middle East and North African countries, particularly the GCC, could further decline this year to $181 billion in the wake of fiscal consolidation and higher oil prices, S&P Global Ratings said in a recent report.
"We expect the 13 Mena sovereigns we rate will borrow about $181 billion this year from domestic and international commercial sources, down six per cent or $11 billion from 2017," said S&P primary credit analyst Trevor Cullinan.
In 2017, sovereign debt fell 30 per cent. The decline will result from fiscal consolidation measures across the GCC and the uptick in oil prices, which will likely push down net-oil-exporting governments' financing needs, said the ratings agency in a report.
Fisch noted the potential inclusion of the GCC region in the JP Morgan EMBI Index, with official phase-in expected to commence in early 2019, to be particularly relevant. The contemplated combined index weighting for the region may be more than 12 per cent, as compared with the current allocation of zero per cent.
"To put the significance of this potential weighting into context, the combined weighting of index heavyweights China, Russia, and Brazil is currently just over 11%. This index inclusion will have a very positive impact on the investment demand dynamic for the GCC, as index-based funds will allocate more capital to the region - a process that has already begun, as confirmed by the recent positive price action of the GCC's sovereign bonds," said Good.
Kuwait is likely to contribute meaningfully to the remaining issuance total in 2018. Although such issuances are not catalyzed by raised regional debt ceilings alone, improved oil prices are set to play a critical role in the demand and supply dynamic for Kuwait and the wider GCC, having a direct impact on multiple budgetary factors across the region, as well as driving positive investor sentiment, said Fisch.
In addition to Kuwait, Saudi Arabia may also consider returning to the market. The Kingdom already came to the market with a jumbo-sized transaction, as did Qatar. Fisch believes that the Saudi sovereign may opportunistically tap the markets again in the second half, while Qatar is less likely to return. On that basis, GCC sovereign issuance for the remainder of the year is likely to be dominated by Kuwait, Saudi Arabia and possibly the UAE.
While the GCC region has, in the past, traded at a tighter credit spread relative to other emerging market peers, the sharp correction in oil prices in 2015 has reversed that relationship, with the GCC region trading with a higher risk premium versus the broader peer group. Fisch views current trading levels as attractive, particularly so given the recovery in energy prices.
"Looking at the emerging market asset class in the context of the broader markets, we believe that the asset class deserves a higher portfolio allocation than it currently enjoys. A combination of predominantly robust fundamentals, along with much more compelling valuation characteristics, mean that emerging markets will offer plenty of attractive opportunities as 2018 progresses. We expect each region in the emerging market space to offer a unique set of risks and opportunities. In many ways, it can be argued that the risk-reward dynamic is particularly compelling for the GCC region," said Good.
By Issac John
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