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‘Goldilocks’ moment for Mideast bond issuance

‘Goldilocks’ moment for Mideast bond issuance

October 12
14:13 2017


Less than three years ago, Saudi Arabia, Oman and Kuwait had no international debt. The economies did not need to borrow on capital markets, because revenues from oil, then trading at close to $100 a barrel, were sufficient.

Today, with the oil price almost half what it once was, the picture could not be more different. Middle Eastern countries have borrowed at record levels in 2017. Sovereigns and local authorities have issued close to $60bn of bonds this year, surpassing the full-year record, set in 2016, of $42bn, according to Dealogic data.

Saudi Arabia has set the pace with the largest syndicated offering by an emerging market this year, as it borrowed $12.5bn late last month. Oman, Kuwait, Abu Dhabi, Jordan, Iraq and Bahrain have also sold debt. The sales have reinforced the region’s presence among emerging market debt portfolios just as investors pour money into bond funds in the hunt for returns.

But the surge in Middle East borrowing is not just a story of these economies facing more strains. Instead, a mild recovery in the oil price has arguably created a “Goldilocks” moment for bond issuance from the region. Larger revenues from the energy sector are reassuring investors, who in some cases are lending for 30 years, while oil’s rally is not yet powerful enough to weaken the countries’ ambitions to reduce their historic dependence on crude. Brent crude is trading at $56.50, compared with below $40 early last year.

“The funds that they are raising is to help close the fiscal gap,” says Hani Deaibes, head of JPMorgan’s debt capital markets for the Middle East and north Africa. “This money will go into investments, and a part of the investments they are making is to support their strategy, at the heart of which is the diversification away from oil.”

One notable absentee has been Qatar, which sold $9bn last year, but has remained on the sidelines since countries in the region cut diplomatic relations with the gas rich nation in June.

Among the economies that have tapped the debt markets this year, the push to cut their reliance on oil is most notable in Saudi Arabia where the king’s powerful son, Mohammed bin Salman, has launched a programme of reforms known as “Vision 2030” which aims to boost investment in the private sector.

While a higher oil price has led the finance ministry to cut the projected deficit for the first half of 2017 to $19.4bn, compared with a planned $53bn deficit for the entire year, the kingdom still needs to raise additional cash to kick-start the programme of reforms.

Richard Mallinson, an analyst at Energy Aspects in London, highlights the low levels of debt the economies had at the start of the oil decline and says: “You need to pump money in to sow the seeds to what will eventually strengthen the non-oil sector.”

Saudi Arabia and Abu Dhabi have tapped the bond market for as long as 30 years, debt that will be serviced in large part by oil revenues, but could also be used to reshape the region’s economic priorities over a matter of decades. They are also reforming generous government subsidies, including for fuel, which have been a drain on government funds.

Bankers and investors also point to global flows of money towards emerging market assets this year as helping support greater debt issuance. Saudi Arabia and Abu Dhabi appeal to buyers of highly rated bonds while other regional borrowers benefit from emerging market index inclusion, which compels buying from global investors whose portfolios track such benchmarks.

What is more, the currencies of Middle Eastern regions are typically pegged to the US dollar, these countries also stand out from other EM countries as they are insulated from higher interest costs should the reserve currency appreciate in value, often a trigger for instability in the sector.

Factors elsewhere in the global economy have created a supportive dynamic for Middle Eastern debt, according to market participants.

“You have a lot of Asia investors looking outside of Asia because in particular in China valuation is quite tight,” says Charles de Quinsonas, an investor at M&G. “The Middle East has been one of the regions [where they’ve been looking],” he adds.

For investors exposed to developed market bonds and equities, which continue to trade close to record-high valuations, the yields on Middle Eastern debt can also look very attractive.

One banker specialising in the region points to the “fundamental hunt for yield”, highlighting bonds in Europe. Last month, Austria sold a 100-year €3.5bn bond with a yield of just over 2 per cent.

“You can look at that and say OK here’s Abu Dhabi, mid double A, stable credit, and it’s giving me a pick-up over stuff I can buy elsewhere,” he says. Abu Dhabi sold $10bn of bonds at the start of October, with a 30-year tranche coming with a coupon of 4.125 per cent.



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