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Tue 19 Jan 2016 01:45 PM

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Gulf sovereign bond issues to surge as gov'ts plug deficits

Gov'ts have previously largely held off from borrowing abroad, preferring to draw down their fiscal reserves

Gulf sovereign bond issues to surge as gov'ts plug deficits

Governments in the wealthy Gulf Arab oil exporting countries look set to borrow from the international bond market at a record pace this year, putting fresh pressure on bond prices, as they cover budget deficits created by low oil prices.

For the first 18 months after oil began tumbling in mid-2014, governments largely held off from borrowing abroad, preferring to draw down their fiscal reserves and in some cases borrow domestically.

That strategy is reaching its limits as the drawdown begins to alarm financial markets and push up local market interest rates.

So governments in the six-nation Gulf Cooperation Council will turn to the foreign debt market to help cover deficits which are expected this year to near $140 billion, or 11 percent of gross domestic product (GDP), Moody's estimates.

Sharjah, one of the seven United Arab Emirates, may issue a US dollar Islamic bond after investor meetings that started last week.

"This year I expect a meaningful uptick in GCC sovereign fund-raising," said Andy Cairns, global head of debt origination and distribution at National Bank of Abu Dhabi (NBAD).

"From the capital markets side it is not inconceivable that we see $20 billion of GCC sovereign supply."

That would be an eight-fold jump in supply; last year, the emirate of Ras Al Khaimah raised $1 billion in the international bond market and Bahrain raised $1.5 billion.

Saudi Arabia, which last year resumed issuing domestic bonds for the first time since 2007, plans to issue international bonds in 2016 to help maintain the solvency of the kingdom's banking system, Finance Minister Ibrahim Alassaf told local newspaper al-Eqtisadiah In December.

Kuwait and Oman have said they may issue internationally; for Oman, it would be the first international sale of bonds since 1997. Qatar, where the central bank has recently curtailed domestic Treasury bill issues in response to tightening liquidity, is also likely to issue abroad.

"We expect the financing mix to shift from liquidating assets to issuing market debt, and we expect Saudi Arabia, Oman, Bahrain to increase their recourse to international debt issuance. It will relieve some of the pressure put on reserves and domestic banking systems," said Mathias Angonin, analyst at Moody's in Dubai.

International borrowing by GCC sovereign and corporate issuers through bonds, sukuk and syndicated loans, but excluding bilateral loans, totalled about $90 billion last year, NBAD estimates; more than $68 billion was through syndicated loans.

But Gulf banks are now much less flush as their deposit growth slows or even reverses; the government of Qatar raised a syndicated loan of only $5.5 billion this month, after originally aiming for as much as $10 billion.

So bonds have room to make a comeback.

"The price levels at which GCC sovereigns come for loans are quite aggressive and largely preclude meaningful participation from GCC lenders. Whereas for bonds and sukuk, I am confident we will see continued buy-side participation from GCC investors for GCC sovereigns," Cairns said.

Spreads have already come under heavy pressure as falling oil prices deter investors from outside the region and squeeze local banks' scope to buy their governments' bonds.

An August 2023 bond from Bahrain is trading 172 basis points outside a similarly rated April 2023 dollar bond from Indonesia ; at the end of September, the spread was just 49 bps. Brent crude, now below $30, is keeping the pressure on Gulf governments' finances.

"Spreads for many GCC borrowers have already repriced significantly since last summer. At some point, maybe soon, international investors will see value relative to other parts of the world," said David Greenbaum, head of corporate and financial debt origination in the region at Deutsche Bank.

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