Middle East expected to lift emerging market sovereign debt

Sales of hard currency debt issued by developing nations should bounce back this year after a torrid 2018 for emerging markets, driven by fresh supply from the Middle East issuers, especially Saudi Arabia, Morgan Stanley said.

Sovereign hard currency gross issuance is expected to rise to $158 billion (Dh579.9bn) this year – a 15 per cent increase on 2018 – but will remain below the record $674bn sold in 2017, Morgan Stanley strategist Simon Waever said in the bank’s EM sovereign credit outlook for 2019.

A grim combination of a strong dollar, China-US trade tensions, central banks turning off the money taps, cooling growth around the globe and crisis in Turkey and Argentina have battered emerging markets over the past 12 months.

While gross issuance recovered, this translated only into a $1bn increase of net issuance year-on-year this year due to emerging markets facing heavy redemptions, Morgan Stanley found. It added that overall debt redemptions were rising to $2bn this year from $1.4bn last year.

Among the issuers, Saudi Arabia and Indonesia are likely to remain large issuers, wrote Mr Waever, expected to sell more than $10bn each. Abu Dhabi and Kuwait could both come with large deals after a hiatus in 2018, although battered Argentina will stay out of the market after its bumper $9bn deal. Uzbekistan and Benin, meanwhile, have both announced they want to sell inaugural hard currency bonds.

Among sovereign issuers, oil exporters’ share will grow again, predicted Morgan Stanley, accounting for just over half of 2019 issuance compared to about one third over 2013-15. Easing oil prices in the later months of 2018 made many governments’ oil price assumptions look optimistic, it said.

However, cutting back on budgeted expenditure could be tough as there was pressure to boost spending because of weak growth or social pressure given the austerity measures in the past few years by crude exporters.

“This dynamic should keep external issuance reasonably high,” according to Morgan Stanley.

With emerging market issues traditionally tapping markets early in the year, 2019 ought to be no exception as governments face heavy redemptions in the second quarter of 2019 and worry about tighter financial conditions throughout the year, the lender added.

“Specifically, 17 per cent of total issuance historically comes in January,” Mr Weaver said. “The Philippines has already announced a benchmark 10year bond deal, and we think that Egypt, Oman and Mexico are likely to issue sooner rather than later.”