Middle East debt markets remain vibrant

Published in MEED, 1 May 2018

Bolstered by Saudi Arabia’s record-breaking $17.5bn bond issue in October, Middle Eastern sovereign debt issuance reached $104.1bn in 2017, according to data compiled by Thomson Reuters. That was 34 per cent more than the previous year, and the highest on record.

Saudi Arabia was the most active country in the region, accounting for 30 per cent of activity by value, followed by the UAE with 27.8 per cent. Sukuk issuance was up 36 per cent year-on-year, to $51.5bn.

Compared to this stellar year, 2018 has got off to a more mixed start. While a number of governments have successfully sold more debt – with Saudi Arabia and Qatar at the forefront – there have been setbacks too. Bahrain notably pulled a conventional bond issue in March.

The overall trend is clear, however, with ever more debt being issued. Despite the recent strength of oil prices, many governments continue to face large budget deficits.

Even if Brent crude ends up averaging the recent high of $74 a barrel in 2018, Bahrain, Libya and Oman will all still run deficits, according to the IMF. By the same measure, should the average price fall below $70 a barrel, Saudi Arabia will run a deficit for the second year running.

Saudi Arabia is the most active debt market participant so far this year. In mid-March, Riyadh increased a $10bn loan facility signed in 2016 to $16bn. It also extended the term of the loan by two years, to 2023, and secured lower pricing.

This was followed in April with an $11bn bond issue made up of three tranches, with $4.5bn due to mature in 2025 priced at 140 basis points (bp) over US Treasuries, $3bn due in 2030 at 175bp and $3.5bn maturing in 2049 at 210bp.

A day after Riyadh’s April issue, Qatar finalised a $12bn bond issue. Doha reportedly also secured keener pricing, with yields of 135bp, 170bp and 205bp respectively for two $3bn tranches of five and 10 years and a $6bn tranche over 30 years. Demand for the Saudi bond reached $51bn, while the order book for the Qatari bond was $52bn.

International investors’ appetite for Gulf debt seemed unaffected by political and economic problems such as the downgrades of Bahrain, Oman and Qatar by credit ratings agencies; the legal complications surrounding the Dana Gas sukuk; and the diplomatic rupture of the GCC itself. Indeed, according to data compiled by Dubai-based Emirates NBD and Zurich-based Fisch Asset Management, buyers from outside the region bought three-quarters of the bonds.

Neither have Saudi Arabia and Qatar had the market to themselves this year. Oman has also been active, issuing a $6.5bn bond – its largest ever – in mid-January. The three-tranche offering involved $1.25bn maturing in five years, a $2.5bn 10-year tranche and a $2.75bn 30-year tranche. The offering attracted orders of $15bn, according to Reuters. A sukuk issue could soon follow. On a more modest scale, the emirate of Sharjah sold a $1bn, 10-year sukuk in early March.

Many of the sovereign deals in 2017 were more than three times oversubscribed and, based on recent activity, investor interest remains strong. The one exception to all this positive news is Bahrain. In late March, Manama shelved plans for a conventional bond issue after balking at the pricing demands of investors.

It did press ahead with a $1bn sukuk with a yield of 6.875 per cent, but the episode underlines the problems that Manama now faces – it is rated as junk by all three major credit ratings agencies, is the weakest GCC economy by almost any measure, and few expect it to close the gap with its neighbours any time soon.

“Bahrain [has been] diverging quite significantly from the pack,” says Alex Perjessy, a senior analyst at Moody’s Investors Service. “There is a very high likelihood that GCC sovereign credit profiles will continue to diverge, more or less in the same way we have seen over the past two or three years.”

According to senior economist at Oxford Economics, Maya Senussi, the key reason the Bahrain bond sale failed was a lack of transparency about the support Manama could expect from its richer neighbours, in particular Saudi Arabia. This remains a concern, but it is unlikely to set a pattern for other Gulf issuers. And Bahrain’s huge shale oil find, announced on 1 April, could encourage it back to the market.

Many questions remain to be answered about that new oil reserve – including how much can be extracted from the field and at what cost – and it will be about five years before any revenues start flowing from it.

“With over $3.5bn in projected budget deficit and several upcoming bond maturities this year, we think that new debt offerings will have to surface again soon,” says Anita Yadav, head of fixed income research at Emirates NBD, of the Bahrain situation. In the meantime, it is clear Manama will have to return to the market before long.

What approach the country will take remains a subject of debate. The Central Bank of Bahrain said in a statement on 29 March that the government “is expected to raise financings through other sources of funding, including local debt capital markets, and potentially could seek to come back to the international debt capital markets at a later stage in 2018”.

Beyond these primary market initiatives, there are also efforts to develop the secondary debt market, which at the moment is all but non-existent in the region. On 1 April, the Saudi Ministry of Finance’s Debt Management Office announced it had received approval from the Capital Market Authority to list SR204.4bn ($54.5bn) worth of bonds and sukuk on the Saudi Stock Exchange (Tadawul) this year. Such initiatives have been welcomed by observers. “The ability to diversify away from external borrowing is a positive development,” said Perjessy.

Taken as a whole, the signs across the region are promising. Debt issuance across the Middle East and North Africa in the first quarter of this year was $23.9bn. That was down 25 per cent compared to the same period in 2017, but was still the second-highest level Thomson Reuters had ever recorded.

While 2018 may not prove to be quite as active as 2017, it nonetheless looks to be a relatively busy year for those involved in the region’s debt capital market.