Dubai: As investors dealt with volatility across most of its prized asset classes, Gulf bonds are emerging resilient after yet another crisis, although not without having endured its own fair share of routs.
The region’s debt markets did witness instances of sharp sell-off in the last few weeks as pandemic-induced investor worries soared and oil prices plummeted. But analysts still see them ending the year strong.
“This year total new bond issuances will likely surpass the record $101 billion raised in 2019,” said Anita Yadav, a capital markets expert, currently on the Gulf Bond & Sukuk Association (GBSA) board.
“This is owing to the fact that sovereign budget deficits will balloon in the face of dismally low falling oil prices,” added Yadav, who has well over two decades of experience in financial markets worldwide.
Analysts at fund manager Franklin Templeton, which at the start of the year saw issuance by Gulf sovereign and corporates entities touching $95 billion in 2020, now sees it hitting $105 billion.
GCC bond markets stay resilient
By raising more than $100 billion in bond placements last year, Gulf borrowers had largely marked a seismic shift from the more private funding route offered by loans.
And so far this year, the GCC bond markets have comparatively stayed resilient, having in recent weeks only sold off 60 per cent of emerging market debt and roughly 50 per cent of high-yield debt.
The large supply of qualifying investment grade sovereign and quasi bonds from the GCC sovereign is likely to continue unabated in coming years
Analysts see issuance picking up meaningfully this year, after the recent round of bond issuances from Abu Dhabi, Qatar and Saudi Arabia – widely seen as evidence of market accessibility, reasonable pricing and strong demand.
“The large supply of qualifying investment grade sovereign and quasi bonds from the GCC sovereign is likely to continue unabated in coming years,” Yadav said.
Middle East bond binge bolsters
Abu Dhabi and Saudi Arabia sold $7 billion in bonds last week, following an earlier Qatar’s $10 billion debt sale, and analysts foresee quasi-government firms and corporates soon following sovereign issuers.
So far, year-to-date, GCC issuers have priced more than $47 billion of USD denominated bonds in international markets, nearly matching the $47.8 billion raised during the same period last year.
The GCC region has increasingly turned into a very significant part of the emerging markets debt world, accounting for more than 20 per cent of both sovereign and corporate emerging market indexes.
Though GCC economies remain small in absolute terms, their attribution to the widely held bond indices has increased noticeably in the recent past, Yadav said, particularly after the inclusion of GCC sovereign and quasi bonds into the JP Morgan emerging market bond index.
“Amid the uncertainty today, the investor community has surely taken note of the fact that the developed markets are no better placed than the emerging markets in the kind of risks that we are facing now,” Yadav added.
Factors supporting bid for bonds
One of the reasons supporting bid for GCC bonds is the expectations of low probability of default
“One of the reasons supporting bid for GCC bonds is the expectations of low probability of default,” Yadav explained.
Net debt of sovereigns in the region still remains relatively low and credit ratings are relatively high compared with than other emerging market countries. Even financially weaker issuers like Bahrain and Oman benefit from expectations of support from neighbors, if need be.
“Another factor helping GCC bonds is the fact that GCC governments have put considerable effort in recent times to promote and deepen their local currency capital markets which in turn can provide alternate source of funding should international monies be hard to get,” Yadav further added.
“Investors also derive comfort from the pegged nature of GCC currencies which alleviates risk of bond issuers struggling to service debt in times of dollar strengthening.”
“Theoretically, anticipation of large new supply and falling credit ratings should pressurize credit spreads on bonds and this is exactly what has happened in the GCC bond universe. Option adjusted spread on GCC credit bonds have risen from 185 basis points in early March to 383bps now.
“However, the widening remains well below the 255bps widening seen in the other wider EM universe,” Yadav added.
Average yield on GCC bonds currently stands at about 4.4 per cent which is not too far from the 4.05 per cent recorded during the same time last year.
This, Yadav said, is as bulk of the credit spread widening was counter balanced by the fall in the yield on benchmark USD Treasury curve.
