(MENAFN- The Peninsula)
By Satish Kanady
DOHA: Supported by stable oil prices, a dovish Fed, and limited global volatility, GCC debt issuance picked up in the second quarter of 2016 (Q2, 16). The markets saw little volatility in yields during the quarter.
Yields have benefited from the relative stability in global oil markets and a dovish Fed. GCC yields saw little volatility in Q2, 16 and continued to steadily trend downwards, as oil prices maintained healthy levels and the Fed rate hike was postponed to the second half of 2016. Yields also seemed to be little affected by the global fallout that followed the Brexit vote. However, GCC spreads to US treasuries have widened as investors fled to safety.
Five to six year paper for Dubai, Abu Dhabi, and Qatar finished the quarter down 21 to 23 basis points, settling at 3.33 percent, 1.90 percent, and 2.37 percent, respectively, noted NBK";s ‘economic udpate";.
Despite recovering oil prices, credit default swaps (CDS) rates were up in Q2, 16 for most GCC sovereigns following persistent speculation over fiscal sustainability and tightening liquidity.
A slew of rating and outlook adjustments, to the downside for most, prompted investor caution. Successfully implementing fiscal reforms and tightening banking liquidity emerged as the main concerns.
Saudi Arabia was the most affected, seeing its CDS rate jump by 26 basis points in Q2, 16, eroding any confidence gained in the past six months. Meanwhile, the United Arab Emirates appeared to emerge as a regional safe haven. Dubai CDS rates dropped 31 basis points to just under 200 swap points for the first time in almost a year, while Abu Dhabi";s swap rates, the lowest amongst its peers, were mostly flat on the quarter.
GCC debt issuance was strong in 1H16, boosted by sovereign issuance. Gross issuance totaled $55bn during the first half of 2016, with $36bn added in Q2, 16 alone. This compares to $74bn issued during the whole of 2015. The stock of outstanding bonds in the region grew by 24 percent in Q2, 16, its fastest pace in five years, to stand at $335bn.
With public sector financing needs expected to top $120bn in 2016, GCC sovereigns continued to tap debt markets for funding, leading the issuance of new debt in Q2, 16. Sovereigns accounted for close to 75 percent of gross issuance during the quarter, issuing $27bn. With liquidity concerns at the forefront, some governments avoided domestic currency issues in favour of international offerings. Appetite for the debt was strong, with Abu Dhabi, Qatar, and Oman, comfortably selling $16.5bn worth of international bonds. Saudi is looking to capitalise on this momentum and is seeking to offer international investors $10bn in foreign currency bonds, if not more.
Regional banks saw a pick-up in issuance over the quarter, raising $6bn; this was their largest offering in four quarters, as they increasingly turned to market funding. With deposit growth slowing across GCC banks, loan-to-deposit ratios have been under pressure. At the same time, competition over short-term funding saw pressures mount in the interbank market, with rates trending upwards.
While GCC debt growth is expected to remain robust on the back of large financing needs, external economic risks may dampen appetite for it. Further US policy rate hikes in 2016 and 2017 and increased global market volatility, such as continued repercussions from Brexit or a sharp slowdown in the Chinese economy, could see appetite for emerging market debt diminish. Upward pressure on the US dollar, and in turn all GCC currencies, may also discourage investment in GCC debt if their offerings are mispriced.
The Peninsula