NBK Research: GCC bond and sukuk issuance surged by $32bn in Q1-2019

About $30bn in fund inflows expected following JP Morgan Emerging Markets Bond Index inclusion

Debt issuance has risen sharply in Q1-2019 to a historical high of $32bn.
Debt issuance has risen sharply in Q1-2019 to a historical high of $32bn.

GCC bond and sukuk issuance surged by $32bn in Q1-2019, lifting outstanding debt in the region to $478bn. Meanwhile, yields in the GCC trended lower, supported by rising oil prices, which have benefitted fiscal consolidation efforts across the region – according to research published by the National Bank of Kuwait (NBK).

A sharp rise in regional debt issuance, led by the sovereigns of Saudi Arabia, was driven by low borrowing costs, good credit ratings, and a strong appetite for regional bonds among international investors. Regional yields are expected to remain low, while issuance is forecast to increase on 2018’s levels.

Global and regional yields continue to trend down in Q1-2019, driven by expected global economic slowdown, dovish signals on monetary policy, low inflation, and a sharp recovery in oil prices from December 2018 lows. Falls were led by Bahrain and Oman, despite continued pressure on fiscal positions.

A fall in Bahrain sovereign yields was sparked by the provision of a $10bn support package by neighbouring countries last year of which it recently received, in tandem with a series of fiscal reforms. Oman yields also fell sharply, supported by the promise of fiscal reforms, including the introduction of VAT.

NBK Group chief economist, Dr Saade Chami, commented: “All GCC sovereigns now have stable outlooks and most have investment grade ratings. International demand for GCC sovereigns is expected to receive a large boost in 2019 as a result of inclusion of five GCC sovereigns (excluding Oman) in the JP Morgan Emerging Markets Bond Index (EMBI). The region could receive as much as $30bn in fund inflows, with most being allocated to larger debt markets such as Saudi Arabia.”

Across the region, policy makers are establishing regulation to improve debt management and increase transparency, market access, and availability of timely information. Last year, the UAE set in place a new debt law and a debt management office, and in Saudi Arabia the local stock exchange, Tadawul, launched bond and sukuk trading.

Although debt issuance slowed in 2018, it has risen sharply in Q1-2019, to a historical high of $32bn and is likely to continue to remain solid throughout the year.

“In the first quarter, we saw significant developments, including Aramco’s $12bn debut bond. Issuance of bonds by GCC sovereigns and corporates is expected to grow in 2019, as a result of largely expansionary budgets and refinancing needs arising from maturing debt,” Dr Chami concluded.

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