(MENAFN - Arab News) The spring months were marked by exceptional turbulence for the Gulf financial markets. Quite apart from the growing risks evident in the global economy, the regional turmoil now know as the "Arab Spring" resulted in sharp stock market corrections and an extreme dearth of new issuance activity in the equity, bond, and sukuk markets alike.
In an encouraging sign, however, things rebounded relatively quickly toward the end of Q1: Stock indexes returned to pre-crisis levels and volumes in fact rose even more, back to figures last seen in the first half of 2010. But after this revival, the second quarter of the year has offered a much more mixed picture. While there have been some unequivocally positive developments, especially in the sukuk space, the positive momentum has been repeatedly tested and given way to a much more stagnant and uneven picture.
Trends in the area of bank lending highlight probably most clearly that all is not well with the GCC economies. According to Chief Economist Jarmo T. Kotilaine of the National Commercial Bank, "While some positive trends have emerged in parts of the region, bank credit in other countries is still at best treading water in a curiously dichotomous environment. A clear positive momentum in bank lending is now underway in Oman, Saudi Arabia, and Qatar. However, Saudi Arabia is the only regional economy to be witnessing a positive trend in private credit which rose at an annual pace of 7.8 percent in June." Overall bank credit in the Kingdom expanded by 7.2 percent, highlighting the diminishing role of public sector credit which earlier during the crisis was the main area of dynamism. While Qatar is still seeing fast growth in bank credit, the pace has declined steadily in recent months to reach 10.1 percent in May. Omani credit growth was in fact by a whisker the highest in the region - 10.2 percent - in May. However, the positive momentum is above all linked to public sector credit with loans to the private sector advancing by a more modest 6.1 percent. By contrast, credit in the UAE is still very measured - at 1.9 percent in April - as banks face ongoing regulatory pressures. Kuwaiti credit growth was even slower at 1.1 percent in June while Bahraini bank lending actually contracted by 1.2 percent in May.
In spite of a temporary recovery in the regional stock markets this spring, equity issuance remains very subdued. Although IPO (initial public offering) activity rebounded from the depths of only one AED66 million (17.9 million) issuance seen during Q1, there were only three offerings in the region during the April-June period as two UAE companies and one Saudi issuer came to the market. The quarter saw a total IPO value of 346 million, as compared to 409.2 million a year earlier. Clearly, the regional IPO stream is far from returning to its pre-crisis rate or even the levels seen last year.
The UAE IPOs during the quarter were by a small Takaful insurer Wataniya which raised AED82.5 million (22.4 million) and by the real estate developer Eshraq Properties Co. of Abu Dhabi which raised AED825 million (225 million). Saudi Arabia saw an issue by Saudi Integrated Telecom Co. (SITC) in May. The company floated 35 percent of its total authorized capital of SR1 billion. SITC provides services in fixed line telecommunications, broadband, and other areas. In addition, Saudi Arabia saw a significant follow-on rights issue by the Makkah-based Jabal Omar Development Company (JODC) which offered 258 million shares with a nominal value of SAR10 each. All four issues were significantly oversubscribed. The pipeline offers prospects of some pick-up in the momentum, although probably not significantly so.
The mixed prospects are partly due to a renewed loss of momentum in the regional stock markets during Q2. All the GCC markets lost ground during the first half of the year with the declines ranging from 0.6 percent in Abu Dhabi and 0.7 percent in Saudi Arabia to 10.7 percent in Kuwait and 12.4 percent in Oman. Also the positive trends in volumes were reversed by June, as a result of which the GCC markets lost a total of 33.4 billion of their aggregate capitalization during the first half of the year. The Kuwait Stock Exchange accounted for a lion's share of this - 17.7 billion - as a result of a 13.4 percent drop. Saudi Arabia and Qatar were the most resilient regional markets, falling by 0.4 percent and 1.3 percent, respectively. The UAE and Bahraini exchanges lost 7.1 percent of their capitalization and the Omani bourse shed 10.2 percent.
Kotilaine noted that "Even though bond and sukuk markets have thawed, the momentum of 4Q, 2010 has not been matched in spite of significant refinancing requirements. The market conditions are much more benign with historically low yields and a convergence between bonds and sukuk. This, among other things, encouraged the government of Dubai one to return to the market in a welcome sign of normalization." The second quarter saw five GCC bond/sukuk issues in excess of 500 million in value and one that fell just short of that. Issuance in the conventional space was led by Mubadala (1.5 billion), Emirates airline (1 billion), and the government of Dubai (500 million). In the Shariah-compliant segment, the most important issuers were the Islamic Development Bank (750 million), HSBC Bank Middle East (500 million), and Sharjah Islamic Bank (400 million). In total, the conventional space saw five issuances with an aggregate value of 3.39 billion.
Excluding ongoing short-term issuances by the Central Bank of Bahrain, there were four sukuk issuances with an aggregate value of 2.18 billion. Compared to Q1, this represented mixed progress. Excluding the exceptional QAR50 billion bond and sukuk issuance by the government of Qatar, the corresponding figures in were 4.79 billion in the conventional space and 1.30 billion in sukuk. In terms of jurisdictions, issuance activity was dominated by Abu Dhabi which has generally been the main source of issuance in the region during entire first half of the year. Overall, UAE names accounted for just under three-quarters of total bond and sukuk issuance during Q2. By contrast, Saudi names - with the exception of the Jeddah-headquartered Islamic Development Bank - were notable through their absence. Consequently, the positive market trends had an unusually narrow geographic footprint. In terms of sectors, sovereign issuers made just under half of the total. The share of financial service was a little over a third. In spite of the continued market volatility, there is substantial pipeline of regional bond and sukuk issues. Much of this is now driven by refinancing requirements with an estimated USD157.4bn worth of outstanding corporate and sovereign bonds as of Dec. 31, 2010. 102.2 billion of the outstanding debt is due to mature by the end of 2015.
Other sources of capital are, similarly, at historically lower levels. Syndicated loan activity fell to less than half of the levels seen in Q1, from 20.9 billion to 8.9 billion, although the figures for the first three months of the year had been skewed by restructuring deals. Activity in Q2 was led by syndications for Zain KSA, the government of Dubai, and Saudi Electricity Company. Private equity deals were minimal with only one purchases recorded in the region. Even as the regional macroeconomic fundamentals look benign, the backdrop of global economic uncertainty still makes for an environment where the recovery is proving frustratingly slow in coming.