A buoyant GCC Bond and Sukuk market achieved an all-time high issuance of USD 70 billion in 2017, with sustained investor appetite expected in 2018, according to a co-authored white paper from Emirates NBD Asset Management (Dubai) and Fisch Asset Management (Zurich). The paper, titled “The GCC Fixed Income Market: Then and Now” identifies key themes in 2017 and provides an outlook for the market in 2018.
The white paper considers a series of landmark events, which had a direct impact on regional debt markets and are considered likely to shape them in 2018. These include increased debt issuance despite elevated geopolitical instability and a spate of sovereign rating downgrades; and emerging fears among investors that higher oil prices may blunt governments’ commitment to economic reform.
Philipp Good, CEO at Fisch Asset Management, said: “While the regional debt market has historically been considered self-sufficient, deals in 2017 showed a clear trend towards a diversification of the investor base, indicative of a developing GCC bond market with a sophisticated variety of structures and maturities. Key take-aways from our joint research include the market’s ability to absorb a significant uptick in bond issuance without a real price disruption, which speaks strongly for the GCC’s appeal to global emerging market investors, particularly in Asia and the US.”
An acceleration in sovereign issuance was necessitated by a persistent need to fund twin deficits due to lower oil prices, and was comfortably met by non-GCC investors who absorbed over 75% of the amount issued in the primary market. The white paper concluded that increased interest from global investors, looking to diversify their fixed income portfolios, and a rise in jumbo sovereign issues were two of the key drivers for demand.
Usman Ahmed, Head of Investments at Emirates NBD Asset Management, said: “Emerging market fixed income ended 2017 on a strong note and the positive sentiment has carried over into 2018. We expect growth of the GCC’s debt investor base to continue in 2018, with demand coming from the record inflows to emerging markets and supply provided by the very real diversification needs of the region. The GCC remains a solid value proposition for debt investors, with credit spreads attractive given current and projected credit fundamentals.”
A key driver for better access to the GCC bond market was hard currency issuance. In the Central & Eastern Europe, Middle East and Africa (CEEMEA) region, hard currency issuance has historically been dominated by Russia and Turkey. By contrast, in 2017 the GCC held the lion’s share. Four of the top five ‘jumbo deals’ (USD 5 billion+) in emerging markets came from GCC sovereigns (two from Saudi Arabia, one from Abu Dhabi and one from Kuwait).
Good continued: “What is particularly promising is that the rise in issuance occurred despite a number of disruptive events – particularly for sovereigns. Qatar, Oman and Bahrain all had their ratings downgraded, while Dana Gas PJSC began a contentious Sukuk restructuring process. Credit market volatility was further increased by a lack of sustained regional harmony, with the unforeseen embargo of Qatar followed by the heavily publicized anti-corruption measures in Saudi Arabia, both of which caused shockwaves. But issuance has gathered pace regardless, and the 2018 pipeline looks robust.”
Geopolitical developments in the GCC also failed to impede Islamic debt issuance, as some analysts outside the region had feared. Instead, between June and December 2017, GCC issuers raised USD 2.25 billion of Shari’a-compliant debt, which attracted strong order books and was an encouraging confirmation that investors understand GCC risk enough to isolate unexpected events.
Ahmed continued: “Looking ahead, our projection is that the widely expected stability in Brent crude prices should provide some reprieve to sovereign balance sheets, but is unlikely to address the deficits that will be sustained in 2018. Consequently, the trend of large sovereign and quasi-sovereign issuance is set to continue, with the GCC likely to continue to play a prominent role in 2018’s new issue market. Net new issuance may increase, which will test current strong market technicals.”
Within its outlook for 2018, the white paper indicated that Convertible Bond issuance was overdue an uptick, but that until rates rise further the straight debt market will continue to dominate. While Convertible Bonds have been a feature of GCC markets for more than 10 years, with around 20 issues totalling USD 23 billion to date, there remains a relative lack of supply to meet investor demand.