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Sovereign debt issuance in GCC to surge in 2018
September 1, 2018, 2:28 pm

Higher oil prices and improved financials are likely to influence the demand and supply mechanics and impact various budgetary factors, as well as drive positive investor sentiment in Kuwait and the other five Gulf Cooperation Council (GCC) states during the rest of the year.

The positive assessment of the region’s economic health, made by the Zurich-based Fisch Asset Management, also predicted that in the rest of the year GCC sovereign debt issuances could exceed that of 2017. With over $30 billion in bonds issued in the first half of 2018, the remainder of the year could prove even more rewarding to international bond markets, said Fisch, adding that Kuwait’s contributions in the second-half of the year could play a significant role in boosting total GCC issuance in 2018.

In addition to Kuwait, Saudi Arabia may also consider returning to the market, following the large issuance it made during the first-half of 2018. Fisch said it expected GCC sovereign issuance for the remainder of the year to be most likely dominated by Kuwait, Saudi Arabia and possibly the UAE, with Saudi Arabia reappearing to tap the markets again in the second half, while Qatar is less likely to return.

In mid-April of this year, Saudi Arabia raised $11 billion in the biggest dollar sale by an emerging market sovereign so far this year, piquing estranged neighbor Qatar’s record, and topping the $9 billion that Argentina had raised in January. The Kingdom sold $4.5 billion worth of bonds due in 2025 at 140 basis points over similar-maturity US Treasuries, $3 billion of notes maturing in 2030 at 175 basis points over the similar benchmark and $3.5 billion of 2049 bonds at 210 basis points.

Since the decrease in oil revenues, following the precipitous price plunge in mid-2014, Saudi Arabia has been one of the biggest bond issuers in emerging markets, beginning with its sale of dollar bonds in 2016. It has so far raised $21.5 billion in 2017 and $17.5 billion in 2016 and plans to borrow the equivalent of $31 billion this year to bridge the expected budget deficit of $52 billion and to fund growth plans after its economy shrank last year.

Issuance from the six-nation Gulf Cooperation Council, which includes the two biggest Arab economies of Saudi Arabia and the United Arab Emirates, climbed to $16.8 billion in the first two months of the year, mostly due to sales by Oman and Qatar National Bank. Total GCC bond sales will probably range between $70 billion and $90 billion this year, potentially exceeding the record $84.9 billion of issuance in 2017.

“The robust performance by the GCC primary markets stands out as particularly strong when compared to the broader emerging market trend, where aggregate issuance is lagging significantly behind 2017 levels,” said Philipp Good, CEO at Fisch Asset Management. He added that the potential inclusion of the GCC region in the JP Morgan EMBI Index, with official phase-in expected to commence in early 2019, would be particularly relevant to future issuances.

In the past, Kuwait has faced domestic hurdles to issuance of bonds, primarily from the country’s contentious parliament. Lawmakers have questioned the government’s attempts to use budget deficits to borrow from abroad, while having large surpluses from its own international investments. However, in recent weeks, there has been a softening in the parliament’s approach.

Kuwait News Agency reported recently that the government and the parliament had reached a tentative agreement on approving the public loan law. In January, the Parliamentary Financial and Economic Committee had approved amendments to the public loan law that would allow the government to raise the borrowing ceiling from KD10 billion to KD25 billion, and increase maturity tenure of the bonds from the prevailing 10 years to 30 years.

The reported tacit understanding between the government and parliament on the bill would allegedly be subject to various criteria, including the need for the government to present the national project for financial and economic sustainability that requires the necessary legislation. The approval is also subject to reaching an agreement on additional principles to reduce government expenditure while diversifying non-oil revenues to strengthen sources of income.

Other criteria purported to being imposed by parliament include amendment to the principles of budget preparation in executing reforms pledged by the government; submitting a new draft bill to deal with the root cause of all financial and structural deficiencies; and stipulations that any loan should be based on criteria set by supervisory authorities. The government is also believed to be making efforts to push through an array of other draft bills, such as the issuance of Islamic bonds, which the current law forbids the government from issuing.

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