GCC bond issuance surges to record $40bn in Q2

The GCC bond issuance hit a record $40bn in 2Q19 dominated by sovereigns and quasi-sovereigns. The second quarter issuance broke the previous high of $32bn recorded in the first quarter of 2019 paving the way for a strong year overall. The solid issuance in 2Q19 lifted total GCC outstanding debt to $501bn from $478bn in Q1, offsetting a large volume of maturing debt.

The issuance was dominated by sovereigns and quasi-sovereigns, with funding for strategic investments by sovereign wealth funds and state-owned enterprises a strong driver. In addition, a large volume of maturing debt has likely helped ramp-up new issuance. Some $43bn in maturing debt is scheduled for 2019, of which $28bn had matured as of early this month, NBK Research said in its ‘GCC Debt Market’ report.

With global and regional borrowing costs already low and perhaps set to decline further, issuance could remain strong for the remainder of the year. Moreover, foreign investor appetite for regional paper remains solid, and GCC borrowing needs are supported by expansionary budgets and the recent drop in oil prices if sustained, the analysts said.

Ongoing trade tensions, weaker economic data, low inflation, and interest rate cut prospects saw benchmark global yields fall in 2Q19. GCC bond yields tracked their global counterparts lower and indeed saw steeper declines partly on increased demand due to EMBI index inclusions. Investors appeared to be relatively unswayed by recent geopolitical tensions in the Gulf, though a further escalation or alternatively falls in oil prices and revenues that jeopardize the fiscal situation pose a downside risk to GCC fixed income markets.

“GCC yields on the whole saw steeper declines than their global counterparts, influenced by similar factors but also higher starting points for yields, Brent oil prices reaching above $75/bbl mid-quarter (though they have since fallen) and bond index inclusion”, NBK analysts noted.

Regional demand has also been supported by the imminent inclusion of multiple GCC sovereigns in the JP Morgan Emerging markets Bond Index (EMBI). With $300bn in assets under management and an assigned GCC weight of 11.3 percent in the EMBI index, the region is estimated to receive approximately $30bn in fund inflows, with more than half going to the larger debt markets of Qatar and Saudi Arabia.

Looking forward, GCC yields will continue to be influenced by global yields, which as described above have moved lower on growth concerns. However, declines in GCC yields could be limited if weaker world growth causes oil prices to fall, implying larger fiscal deficits and funding requirements. A further or sustained flare up in regional geopolitical tensions involving Iran could also underpin GCC yields, the analysts said.

Source from: The Peninsula