Strengthening oil prices expected to weaken GCC debt issuances: IIF

Strengthening oil prices are expected to weaken the Gulf Co-operation Council (GCC) debt issuances, according to the Institute of International Finance (IIF), the US-based economic think tank. “We expect issuance to slow down as the oil price increase reduces financing needs,” IIF said in a report. Bond bonanza continued in GCC in early 2018 with large sovereign issues from Oman, Qatar, and Saudi Arabia.

IIF expects Brent to average $72/bbl (per barrel) in 2018 and $65/bbl in 2019; the modest fall in prices next year will be driven by the output boost in Saudi Arabia and Russia, and continued increase in the US and Canada.

The recent Opec/non-Opec agreement to increase oil output is a clear victory for the new swing producers, Saudi Arabia and Russia, as they have the most spare capacity to increase production, it said, adding “Brent future oil prices indicate a gradual and modest decline in oil prices through December 2020”.

After 18 months of supply curbs, the 14 Opec (Organisation of the Petroleum Exporting Countries) members and 10 non-Opec oil producers, led by Saudi Arabia and Russia, respectively, have agreed to jointly raise output from July this year to cool down rising prices and head off potential future shortages. Although small compared to dollar denominations, IIF said the GCC issuance in other currency markets will peak in 2018 with the Swiss Franc and Chinese Renminbi taking the lead. The elevated US treasury yields and stronger dollar sparked sell-off across the EMs (emerging markets) and pushed yields higher, it said. Highlighting that the GCC bond outflows from March to May this year were much lower compared to that of the other EMs; it said “looking ahead, the outflows are expected to be limited in the months to come.”

In the equity sphere, IIF found that supported by higher oil prices, the GCC regional equity index grew by 12% since the beginning of the year, although the overall GCC performance is uneven. Strong earnings, announced reforms, and equity index upgrade pushed Tadawul stocks higher, while other GCC markets demonstrated mixed results, it said.

Unlike other emerging markets, the GCC witnessed large equity inflow in early 2018, mostly into Saudi Arabia in context of the FTSI and MSCI upgrade, it added.

“The energy and banking sectors performed well, respectively supported by higher oil prices and rising interest rates,” it said.