Appetite for GCC bonds grows

Recently concluded Bahrain sovereign issuance was a sure success, with investors rushing to buy a new high-yield name, shows the strong appetite for the country’s asset has not diminished. Bahrain sold an $3.0 billion (Dh11 billion) bond offering comprising $850 million sukuk (7.5 years) and conventional bonds worth $1.25 billion and $900 million with 12 years and 30 years tenors, respectively.

Stronger-than-anticipated demand drove the combined book value to close in excess of $15 billion, 5 times oversubscribed. The sovereign issuance was largely aimed at addressing fiscal challenges caused by weak oil prices (break even oil price at $101/barrel), low foreign reserves (estimated at $2.4 billion for 2017, 1.4 times months of imports), wider fiscal deficit (IMF projection: 12.2 per cent in 2017), and higher public debt (76 per cent of GDP). Bahrain is rated BB- by S&P, BB+ by Fitch, and B1 by Moody’s with a negative outlook.

On the economic front, Bahrain is fairly diversified, with no single industry accounting for more than 20 per cent of real GDP and the non-oil sector contributing 81 per cent.

Notable issuances this year were Saudi Arabia ($9 billion, about 3.6 times oversubscribed), Kuwait ($8 billion, about 3.6 times oversubscribed), Oman ($7 billion, about 4 times oversubscribed) and Bahrain ($3 billion, 5 times oversubscribed), reflecting a stronger appetite and increased attractiveness of the regional debt market. Thanks to the looming possibility of low interest rates environment (10 year US Treasury yields touched yearly lows of 2.02 per cent) in the near future, GCC issuances will likely lure investors, given the better yield and superior credit quality.

Given no sizeable liquid sovereign wealth fund that it can draw on, Bahrain will continue to entirely depend on debt funding to finance its budget deficit until the government formulates a convincing and credible fiscal policy plan. As of June 2017, a total of $6.73 billion was allocated to projects and $1.16 billion was disbursed, in line with project implementation agreements; the fund’s remaining $769 million is due to be allocated in the next phase. Sensex (IN)