Tight liquidity, rising fund costs seen boosting GCC bond market

Dubai: The total volume of bonds and sukuk issuance across the GCC is likely to remain strong this year due to the rising cost of funds and tightening liquidity in the banking sector, experts said ahead of the annual Bonds, Loans & Sukuk Middle East conference that opened in Dubai on Tuesday.

Speaking to Gulf News ahead of the conference, Noor Bank treasurer Damian White said the rising funding costs are expected to attract more companies to tap the debt capital market.

“As funding costs for banks rise, these need to be reflected in finance pricing. That will naturally incentivise the larger and more price sensitive borrowers to closely examine all funding options. For some, the sukuk/bond market may become an attractive alternative, especially if they are seeking to diversify funding sources.”

He, however, said issuers shouldn’t automatically expect cheaper pricing from sukuk markets.

“At the end of the day, in our market, banks still remain the largest buyer of these securities,” said White.

Despite an increased appetite for debt capital market issuance, it may not a viable option for many companies due to the regulatory filing requirements and credit ratings.

Usually, only larger organisations are equipped to obtain a public credit rating and meet the documentary and disclosure requirements required for issuing tradable securities.

Borrowers with weaker or complicated credit profiles, or those who want quicker access to funding, will continue to access the bank market.

The overall issuance is also expected to be boosted by regional sovereign debt issuances. A sharp decline in oil prices, fiscal consolidation efforts and upcoming refinancing needs debts are expected to keep debt issuance by Middle East sovereigns elevated in 2016, according to Standard & Poor’s.

The rating agency projects that the 13 Middle East sovereigns that it rates will borrow an equivalent of $134 billion (Dh492.18 billion) from long-term commercial sources in 2016.

This compares with total commercial borrowing of $143 billion in 2015.

The sizeable fiscal assets accumulated by Abu Dhabi, Kuwait, Qatar and Saudi Arabia provide them with the option to either issue debt or liquidate some of these assets.

“Based on our assumptions, we now expect a rise in GCC sovereign gross commercial long-term borrowing to $45 billion in 2016, up from $40 billion in 2015 and $4 billion in 2014,” said Trevor Cullinan, an analyst at S&P in the MENA Sovereign Debt Report 2015. “Historically, the appetite for GCC sovereigns to increase their debt burdens has been relatively limited.”

Despite a growing appetite for bonds and sukuks for regional corporates, banks will continue to remain a primary source of funding.

“Despite [the] relative liquidity squeeze being witnessed by regional banks in GCC lately, the bank market continues to remain the primary source of funding for regional corporates, even more so than before,” said Saadaat Yaqub, head of Wholesale Banking at Noor Bank.

Analysts expect weak global oil prices and shrinking government spending across the GCC to keep sukuk issuance at below-peak levels in 2016.

According to rating agency Standard & Poor’s, total issuance this year is expected to reach $50-$55 billion, compared with $63.5 billion in 2015 and $116.4 billion in 2014.