(MENAFN- The Peninsula) By Satish Kanady / The Peninsula
The bond issuance in the GCC was strong but slightly slower than in 1Q17, led again by sovereigns. Oman and Saudi were the only sovereigns to issue internationally. The ongoing diplomatic stand-off within the region has increased the riskiness, but the GCC primary debt market activity is expected to be healthy in the second half of 2017, noted NBK's ‘economic update'.
GCC yields were mixed in 2Q17 as markets reacted to a more optimistic economic outlook, low inflation, and geopolitical risks.
Qatari and Omani yields jumped following increased geopolitical risks and financial risks. The rest of the GCC sovereign yields were down or little changed as they tracked US Treasuries. The yields on Qatari sovereign bonds maturing in 2021 saw a breach of 3 percent and finished the quarter at a record high of 3.12 percent, up 45bps.
GCC central banks followed the Fed, raising their policy rates by 25 bps, with Oman and Kuwait being the exceptions. The moves were in line with the need to support USD pegs. As for Oman, this is the third time it passes on hiking its policy rate, despite its peg to the dollar, and the first for Kuwait. However, their central banks did hike repo rates, as they sought to protect their pegs without hurting domestic credit growth.
GCC debt issuance eased in 2Q17 as the quarter coincided with the holy month of Ramadan but remained strong nonetheless. Total new issuance amounted to $20bn compared to $26bn in 1Q17, driven almost entirely by sovereign activity. Private sector activity was relatively weak in 2Q17; with banks accounting for most of it. Total outstanding debt was up a healthy 11 billion, to rest at $394bn.
Sovereign activity stayed strong during 2Q17 with $18bn in new issuance, chiefly driven by Saudi Arabia and helped by Qatar, Oman, and Kuwait. Oman and Saudi were the only two to tap international markets for a $2bn sukuk and a $9bn sukuk, respectively. The offerings were well received, even with Oman's downgrade to below investment grade, reflecting the still strong attractiveness of GCC debt.
Qatar and Kuwait issued domestic debt totaling $3.5bn and $2bn, respectively. The riskiness of investing in the region has risen following the dispute between Qatar and four Arab allies. CDS rates rose across the board as investors digested the fallout.
GCC debt issuance is expected to remain healthy for the rest of 2017, as sovereigns continue to seek cheap deficit financing, but will increasingly face growing risks. The geopolitical rift with Qatar has already weighed on investor confidence, and may hamper future regional issuance activity, especially if the dispute escalates or is drawn-out.
The volatility in current oil prices stands as another risk.
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