GCC sovereigns to lead emerging market bond issues in 2017

Large sovereign bond issues expected this year

Gulf News

Dubai: GCC is expected to account for about 31 per cent of sovereign bond issuances from emerging markets this year. The expected 2017 sovereign issues will be distributed among GCC, Eastern Europe Middle East Africa (EEMEA) and Latin America, according to forecasts by Bank of America Merrill Lynch.

“We expect Saudi Arabia, Argentina, Kuwait and Indonesia to be the largest issuers in 2017. Just these four issuers could account for 32 per cent of the total sovereign gross issuance,” said Jane Brauer, an analyst at Bank of America Merrill Lynch.

Issues from the GCC has been increasing rapidly mainly due to low oil prices, with some new issuers in 2016, and analysts expect the 2017 issuance to continue to be high. Among those, Kuwait inaugurated the external sovereign debt market with $8 billion (Dh29.3 billion) to finance a budget deficit resulting from low oil prices.

Sovereign issuance for 2017 is forecast to be 6 per cent higher compared to the previous year. In 2016, sovereigns issued $135 billion, mainly from Latin America, while corporates issued about $300 billion, mainly from Asia. Analysts expect gross sovereign external issuance to come in at $144bn in 2017.

Although sharp oil price declines since mid-2014 resulted in a significant widening of GCC fiscal deficits, regional sovereigns have implemented fiscal consolidation measures to cut government spending and increase non-oil government revenues. Consequently, going forward the pace and size of sovereign issues are expected to be moderate.

“We expect regional fiscal deficits to be moderate, while the modest recovery in oil price of late should boost government revenues,” said Trevor Cullinan, credit analyst with Standard & Poor’s (S&P).

S&P expects GCC sovereign gross commercial long-term borrowing of $75 billion in 2017, down from $105 billion in 2016 — which was a sharp increase from 2015 ($43 billion). Some clarity has emerged regarding GCC governments’ deficit financing strategies, with Qatar, Bahrain, and Oman largely focused on debt issuance rather than asset drawdowns, while Abu Dhabi, Kuwait, and Saudi Arabia are likely to have more of a split between issuing debt and liquidating part of their assets to fund their central government deficits.

“We note that most GCC countries tapped the international debt markets in 2015 and 2016 to diversify their funding sources and reduce liquidity pressures in their domestic banking systems. This phenomenon is relatively new for the region; historically GCC sovereigns haven’t had much appetite to increase debt burdens,” Cullinan.

Saudi Arabia issued $17.5 billion in Eurobonds in October 2016, at five, 10, and 30-year maturities, to date the largest bond sale by an emerging economy. Analysts expect Saudi Arabia to remain the largest MENA borrower in 2017.

S&P analysts expect Saudi Arabia to account for 27 per cent and 17 per cent of MENA’s commercial borrowing and debt stock, respectively, in 2017, and to remain the second-largest issuer of commercial debt (on a stock basis) in MENA behind Egypt.

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