All GCC sovereigns are potential debt issuers

Dubai: The key drivers of bond issuances in the GCC during 2016 were primarily the sovereign bonds from Saudi Arabia, UAE and Qatar.

The total amount outstanding of the fixed rate dollar denominated bonds of the GCC based issuers (excluding bonds less than $100 million in size) currently is about $192 billion. Of this 37 per cent or $71 billion is issued by the sovereigns directly. The local currency denominated sovereign bonds are few and far between with total outstanding in the six GCC countries being less than equivalent of $25 billion.

Analysts expect while the same set of issuers to tap the market this year, Kuwait is expected to be a major new player in debt issuance. Kuwait has no dollar denominated external debt at present. However, it has now mandated banks to raise up to $10 billion this year, the first tranche of which is expected by May this year.

Qatar has clearly stated its intention to fund the budget deficit, almost entirely via new debt. With low foreign reserves, Bahrain and Oman have little choice than to tap the debt market for budget deficit funding.

The UAE’s budget deficit is small, only at an estimated $3.3 billion, and it has no material need to raise debt for funding deficits. However, the government plans to tap the market to support economic growth and fund infrastructure assets in preparation for the Expo 2020.

Saudi Arabia’s first international bond issuance valued at $17.5 billion in October last year was the biggest recorded emerging market bond, far outpacing the previous record of Qatar’s $9 billion sovereign bonds issued in May 2016. Saudi Arabia’s 2017 budget estimate reflects about $32 billion in new debt this year of which at least half is likely to come from international markets.

Why more debt

Since the advent of low oil prices, budget deficits have become the norm and funding them has warranted material increase in government debt which in turn has come from loans as well as bond issues.

In 2017, although budget deficits will be lower than last year, analysts expect GCC sovereigns may actually issue dollar denominated debt similar to the amount issued in 2016 or even higher because of the deep local currency capital market limits governments’ ability to fund budget deficits via local public debt.

While significant portion of sovereign debt issuances are targeted at funding budget deficits, with modest improvement in oil prices more debts are likely to be raised to boost economic growth in the region.

“Sovereigns are intending to retain liquidity in the local banking system. In order to avoid crowding out the private sector, GCC governments are reflecting a preference for tapping into foreign money to fund their budgets,” said Anita Yadav, Head of Fixed Income Research at Emirates NBD.

Additionally, with interest rates in the US set to increase, governments here may choose to front load their future borrowing requirements to benefit from current lower rates.