(MENAFN- Arab Times) GCC bond yields and CDS rates eased during 1Q15 as concerns over the GCC's fiscal positions receded and perceived risks declined. Yields had risen towards the end of last year following the sharp decline in oil prices and amid concerns of GCC vulnerability.
Meanwhile, the stock of outstanding debt picked up as debt issuance bounced back, led by the financial sector in the UAE. A low rate environment and a robust economic outlook will likely see debt activity pick up this year.
Earlier market fears that GCC economic growth would slow sharply in the wake of the decline in oil prices now appear unfounded. Assurances that government sintend to maintain spending levels despite weakening revenues thanks to healthy reserves and ease of access to debt markets have helped sooth investor sentiment. As a result, sovereign yields have recovered from their December spike when OPEC announced it would not support falling global oil prices. Yields on five year paper settled at 1.81%, 3.63%, 3.00%, and 2.26%, for Abu Dhabi, Bahrain, Dubai, and Qatar, respectively.
Credit default swaps (CDS) for most GCC countries also declined, reflecting the improvement in investor sentiment. Dubai witnessed the largest change in perception, shaving off 46 points from its 1Q15 peak of 265 points in January. Solid fundamentals, satisfactory fiscal prospects and domestic backing from its neighboring emirates have alleviated most concerns. The only exception was Bahrain, which saw its CDS rates rise by 27 points over the quarter, as its vulnerable fiscal position remained a concern. Meanwhile, domestic developments remain the main driver behind risk perception in GCC countries, with regional developments, including the escalating conflict in Yemen, having little impact on GCC bond yields.
GCC debt saw a healthy pickup in issuance during 1Q15 compared to the previous two quarters. As a result, net growth in the stock of debt accelerated to 4.65% year-on-year (y/y),with outstanding debt rising to $265 billion. Despite an increase in issuance, the level remained weaker than a year ago, at $10.4 billion, in part on weaker issuance by the non-financial sector. The financial sector, especially in the UAE, led issuance activity in 1Q15 as more banks began complying with new capital regulations.
Meanwhile, public sector issuance was led by Oman, with its second sovereign bond issuance since the drop in oil prices, and Bahrain, which issued a couple of long term sukuk. Both countries are seeking to finance projected deficits this year.
Debt issuance is likely to recover this year, with rates expected to remain contained and borrowing needs very likely to rise. In the current environment of lower oil prices, governments are expected to require more debt to finance fiscal deficits. The region's robust economic outlook and substantial capital spending plans, means private borrowing needs are expected to remain large.
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