(MENAFN- Gulf Times) Middle East and North African bond sales are set to gain ground on syndicated loans next year as the deepest oil slump since the global financial crisis reduces the available cash for lending.
"Bank liquidity may be affected by oil prices," Mustafa Aziz Ata, the head of debt-capital markets for the Middle East and North Africa at HSBC Holdings, the biggest arranger of bond sales and syndicated loans in the region in 2014 according to data compiled by Bloomberg, said in a phone interview from Dubai on December 17. "If we have a flat overall financing market in the region next year, I would expect bonds to have a 50% share at least." With more than half of Opec's 12 members located in the region, the 48% decline in crude since peaking in June will erode government revenue and cash at banks. Investors including Ashmore Group have said they expect to see an increase in Islamic debt issuance among Gulf Cooperation Council nations next year to help compensate for the collapse in oil income.
Syndicated loans from the UAE to Morocco will account for almost 60% of the $96bn raised in debt markets this year, with bonds making up the rest, according to data compiled by Bloomberg. That's up from 52% in 2013, and 45% a year earlier. Tighter bank liquidity may boost costs for loans, another possible headwind, said Andy Cairns, head of debt origination and distribution at National Bank of Abu Dhabi.
As the lending market's price advantage erodes, "I expect a greater proportion of regional financing to come in bond and sukuk format as we move more towards parity" between loan and bond volumes, said Cairns at NBAD, ranked second for syndicated lending and fifth for bonds this year, Bloomberg data show.
Crude prices averaging above $110 a barrel in 2011 and 2012 have contributed to a 10% increase in bank deposits in the 12 months through October in the UAE. Deposits climbed 16% at Saudi Arabian commercial banks in the period. Surplus cash this year pushed banks to lend aggressively and allowed borrowers to bargain for lower pricing, Ata said. Banks also agreed to provide loans with longer maturities, he said.
Syndicated lending in the Mena region climbed 8% in 2014 to $57bn while bond sales dropped 20%, according to data compiled by Bloomberg. The six-nation GCC countries account for a third of the world's proven oil reserves.
Brent crude dropped to $60.24 a barrel on December 24. Governments in the GCC need oil prices to average about $80 a barrel to balance their budgets, according to International Monetary Fund estimates.
Even as oil prices decline, banks in the GCC will benefit from continued economic growth and public sector spending in 2015 due to strong wealth buffers, Moody's Investors Service said in a report on December 5. Improved consumer and business activity, particularly in the UAE and Saudi Arabia, will also support GCC lending growth at an average of about 10% in 2015, the rating company estimates. Saudi Arabia and Qatar plan more than $700bn of spending on infrastructure and industry over seven years.
Oman's Central Bank governor Hamud Sangur al-Zadjali said in October the country may sell 200mn rials ($519mn) of Islamic bonds next year, its debut sukuk sale. The Qatari government, Saudi Basic Industries Corp and the emirate of Dubai have bonds maturing next year and may issue again to help repayments.
Next year, banks will have less incentive to lend "aggressively" as their liquidity will begin to get hurt and they "tend to get conservative if they start feeling that risk is rising," Abdul Kadir Hussain, chief executive officer at Mashreq Capital Ltd said by phone from Dubai on December 16.
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