By Pratap John/Chief Business Reporter
Debt securities issued in the GCC countries in circulation totals $233bn or 17% of the region’s GDP, a QNB report has shown.
The debt includes $17bn in central bank T-bills (short-term debt instruments that are generally used to manage domestic liquidity) and $216bn in longer-term bonds and sukuks.
However, the level of debt securities in the region is “relatively low” compared with advanced economies where government bonds alone often amount to over 100% of GDP, QNB said.
Most of the bonds issued in the GCC are denominated in foreign currencies ($170bn in Q2 2012, according to BIS data), mainly US dollars.
A key reason for this is that all of the GCC countries, with the exception of Kuwait, have currencies that are pegged to the dollar at a fixed rate. Outstanding GCC foreign bonds have grown at an annual rate of 21% since Q1, 2007.
“This rapid growth has happened partly to compensate for the decline in international syndicated loans, which fell from $112bn in 2007 to $32bn in 2011 and just $8bn in H1, 2012. This decline is most probably a result of global banks, particularly European ones, reducing their international exposure following the 2008 financial crisis.
Therefore, governments and corporations in the GCC have increasingly looked to the bond markets as an alternative source of financing for the substantial projects and corporate expansions underway in the region,” QNB said.
Bond markets are an attractive source of financing for a number of reasons. Long-term bonds are well matched to the long-term nature of the capital investments governments and companies are undertaking.
Additionally, bond yields have reached record lows, making them a low-cost source of financing.
In November 2012, a $1bn, 5-year note from QNB Group was issued with a coupon of 2.125%. This was the lowest ever for a financial institution in the GCC, reflecting the “high confidence” of investors. This issue was part of a $7.5bn medium term note programme initiated by QNB Group to widen its investor base; reduce mismatch in assets and liabilities and to fund growth opportunities.
T-bill issuance in the GCC has also risen, particularly due to increased use by Kuwait and Qatar to manage domestic liquidity and support the development of capital markets. Saudi Arabia, Bahrain and Oman also issue T-bills and the UAE plans it in the near future.
The largest GCC bond market is in the UAE, which accounts for 45% of outstanding bonds in the region and 27% of GDP. This is because the UAE has a longer history of debt financing for major projects than other countries in the region, the report said.
Issuance of new bonds in the GCC reached $38bn for 2012 (as of November 20), slightly below the $45bn issued in 2011. This was due to lower government issuance.
In 2011, Qatar had issued almost $19bn in sovereign bonds and sukuks in 2011, compared to only $4bn in 2012, to help build a yield curve to support local capital markets.
However, corporate debt issuance has risen strongly in 2012, accounting for 75% ($29bn) of new bond issuance, more than double the corporate bond issuance of $14bn in 2011.
The largest issue was a 10-year $4bn sukuk from Saudi Arabia’s General Authority for Civil Aviation.
It was the kingdom’s first government-backed issue and was priced with a coupon of 2.5%, providing a broad indication of the local currency risk-free rate.
Given that $500bn of infrastructure spending is planned in Saudi Arabia over the next five years, the kingdom’s debt market is likely to grow rapidly.
Dolphin Energy, a UAE-Qatar gas pipeline company, issued a $1.3bn bond in February 2012 to refinance existing debt.
QNB Group expects regional companies to continue to drive bond issuance higher in 2013 for a number of reasons.
First, tapping debt markets has the benefit of broadening the investor base of GCC companies.
Second, companies will be keen to take advantage of the prevailing low interest rate environment.
Third, strong growth is expected in the GCC, which will drive continued demand for project financing.
Fourth, the global ambition of leading regional companies will continue to drive their international expansion, sustaining demand for financing.
Fifth, many companies will need to refinance existing debt issues, particularly in the UAE. Finally, as the introduction of Basel III standards gets closer, more banks in the region could look at raising core capital through debt issuance.
“GCC sovereigns have relatively high ratings, with a growing number of institutions obtaining a credit rating. This makes most GCC companies well positioned to enter the bond market and obtain relatively favourable financing terms.
“Furthermore, from the perspective of global institutional investors, the strong rating of GCC sovereigns and companies provide attractive opportunities for portfolio diversification,” QNB said.
