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Gulf Co-operation Council bond sales are on track for a record year as the oil exporters exploit record-low borrowing costs to build infrastructure including airports and gas pipelines.
Government and corporate debt issuances in the six-nation group that includes Saudi Arabia and Qatar have crossed $28bn this year, beating the $27bn of bonds sold in all of 2011, according to data compiled by Bloomberg. That is more than sales for the same period in 2009, which holds the annual record of $40bn, the data show. GCC sales have expanded three times faster this year than the emerging-markets total, which is up 35% to $769bn.
State plans to invest more than $500bn in Saudi Arabia and $130bn in Qatar have persuaded companies including Saudi Electricity Co and Qatar Petroleum to sell bonds to fund expansion.
“There is a fairly decent pipeline of potential issuances out there, over a dozen names that ought to come between now and the end of the year” across the GCC, Mark Watts, head of fixed- income at National Bank of Abu Dhabi, which manages $1.1bn, said by phone on September 10. “People are starting to wake up to the fact that there is true diversification in this region from an economic and financial point of view.”
GCC companies will raise at least another $6bn this year, Watts said. Governments in the region sitting on about 30% of the world’s proven oil reserves are developing infrastructure and industries including petrochemicals and aluminium to reduce their reliance on oil exports, which comprised more than 90% Saudi Arabia’s 2011 public revenue.
Borrowing costs plunged this year as state-linked companies in Dubai paid or refinanced debt, dispelling concern they may default. That has pushed average GCC default risk down 76 basis points in 2012 to 167 on September 12, according to CMA, which is owned by McGraw-Hill Cos and compiles prices quoted by dealers in the privately negotiated market. That outpaced the 53 basis- point decline to 387 in the global average of five-year credit default swaps, which pay the buyer face value if the borrower defaults.
The region’s biggest debt issuance was the 15bn riyals ($4bn) of sukuk, which comply with Islam’s ban on paying interest, sold by Saudi Arabia’s General Authority of Civil Aviation in January. The authority is using the money for an airport in the Red Sea port city of Jeddah.
GCC sales surpassed last year’s total after Qatar Petroleum issued ¥85bn ($1.1bn) of Samurai bonds last month. Qatar, the world’s biggest exporter of liquefied natural gas, is building stadiums and roads as it prepares for the 2022 soccer World Cup. By this time in 2009, GCC issuers had sold $20bn of bonds.
“Yields now are at relatively very low levels encouraging more leverage,” Khalid Howladar, a vice-president at Moody’s Investors Service, said in an emailed response to questions on September 11. “The sovereign issuance helps to set a pricing benchmark for local corporates and there was a lot of refinancing due this year.”
Companies including Dubai-based business park operator Jebel Ali Free Zone FZE are tapping bond markets to refinance debt. Jebel Ali will raise $1.85bn from Islamic bonds and bank loans to refinance 7.5bn dirhams ($2bn) maturing in November, three people familiar with the matter said in June.
Other companies are raising funds for expansion. Emirates Aluminium Co is seeking $4bn from bonds and loans as it builds the world’s biggest smelter in Abu Dhabi, a banker familiar with the plan said last month. The Saudi civil aviation authority said in May would issue a second tranche of notes for an airport expansion in Riyadh.
GCC economic growth will slow to 5.3% this year from 8% in 2011 as oil output expansion slows, according to forecasts of the International Monetary Fund. The International Energy Agency boosted its global oil demand forecast for this year, although it warned last week that “bearish economic indicators” from the US, Europe and China have led to a rise in concerns over the health of the global economy.
“If things turn out negative in Europe the whole world will be affected, including the GCC most likely via lower oil prices,” said Gabriel Sterne, a senior economist at London- based Exotix Holdings Ltd. “On the other hand, increasing exposure to the GCC is a good hedge against euro-crisis risk, in so far as its much less in the firing line than is Europe.”
The region’s banks are contributing to the debt pipeline as they try to keep up with project-financing demands. Loan growth in Saudi Arabia rose to 14% in the year to July, the fastest in more than three years. Bond sales by GCC banks have jumped more than five-fold in 2012 to $8.4bn, data compiled by Bloomberg show.
“It’s quite natural to see them coming into the market,” Watts said. “They have business, they want to expand and they want to secure longer-term borrowing so they can extend longer term borrowing to their customers.”