Is Kuwait’s foreign bond sale enough to balance its budget?

Published March 20th, 2017 - 11:35 GMT
Kuwait is expected to be the only Gulf state with a budget surplus this year. (File photo)
Kuwait is expected to be the only Gulf state with a budget surplus this year. (File photo)

Kuwait scored big with international investors this week with an estimated four-time over-subscription of its first international bond issue.

According to a Bloomberg report, the interest in Kuwait’s bond sale points to the significant underlying strength in the country’s economic position. Kuwait sold $3.5 billion in five-year bonds and $4.5 billion in 10-year debt on March 12.

Orders for the bonds totaled a massive $29 billion, according to bankers quoted by Reuters. Kuwait is expected to be the only Gulf state with a budget surplus this year.

“IMF figures show the current oil price, at about $52 barrel, is more than enough for the country to balance its budget and current account, unlike its neighbors.

Which is why when the OPEC member raised $8 billion from the sale of five-year and 10-year notes this week, and attracted $29 billion in bids, it paid less than what Qatar, Abu Dhabi and Saudi Arabia offered last year,” reported Bloomberg.

Deputy Prime Minister and Minister of Finance Anas Al-Saleh yesterday said Kuwait’s successful bond issuance reflected the country’s strong credit standing. “We are delighted with the successful pricing of this transaction and the positive response we have received from international investors. This highlights Kuwait’s strong credit standing amongst its international peers,” Saleh told KUNA.

"Kuwait has put in place the right policies to ensure that growth and diversification will be maintained in the economy. Furthermore, Kuwait has successfully established large fiscal buffers as a direct result of its ability to efficiently manage oil wealth,” he said.
 
The minister added that this transaction would introduce further diversification to the state’s sources of income and establish a liquid benchmark for Kuwait in international debt markets.
 
Saleh noted that the five-year bond was successfully priced on March 13, 2017 at a yield of 2.887 percent, the 10-year bond with a yield of 3.617 percent with a spread of 75 basis points on the five-year bonds and 100 basis points on the 10-year bonds respectively, over relevant US treasury securities.
 
Kuwait is known for its conservative fiscal policy, typically budgeting for an oil price much lower than expected global oil prices. The government set the 2017/18 budget based on an oil price of $45 per barrel. This price had been set at $35 for the previous year’s budget. But Kuwait is projecting oil prices of $55 to $60 per barrel on average for the current fiscal year, creating a healthy cushion for government revenue.
 
 
This policy, plus a massive fiscal reserve - estimated at $592 billion, according to the Sovereign Wealth Fund Institute - makes Kuwait a safe bet for international investors. “Kuwait’s mix of breakeven oil price for both the budget and the current account shows it is more protected against a drop in oil,” said Simon Quijano-Evans, an emerging-market strategist at Legal & General Investments Management Ltd in London told Bloomberg.
 
The dual-tranche international bond was Kuwait’s debut. NBK Capital, as well as Citi, Deutsche Bank, HSBC, JP Morgan and Standard Chartered Bank served as the bookrunners. Kuwait holds a stellar Aa2 rating from Moody’s Investors Service and an AA rating from Fitch and Standard & Poor’s. The bonds were significantly oversubscribed with 778 investor orders totaling over $29 billion, with strong demand from both international and regional accounts.
 
The sale was also successful in achieving a diversified mix in terms of investor type and geography. The final geographic allocation for the five-year bonds was 4 percent to Asian investors, 46 percent to European and UK investors, 24 percent to investors from the Americas and 26 percent to investors from the Middle East and North Africa (MENA), Saleh elaborated.
 
The allocation for the 10-year bonds was 4 percent to Asian investors, 19 percent to European and UK investors, 51 percent to investors from the Americas and 26 percent to investors from MENA, he noted. The final investor type allocation for the five-year bonds was 22 percent to banks and private banks, 60 percent to asset managers and 18 percent to agencies, pensions
and insurance.
 
The final investor type allocation for the 10-year bonds was 25 percent to banks and private banks, 68 percent to asset-managers and 7 percent to agencies, pensions and insurance, the minister added.
 
By Sara Ahmed

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