How GCC can lower bond issues
dubai — Fiscal consolidation in the GCC in 2016 will likely lower international bond issuance volumes by $6.4 billion in 2017, while “still keeping them at historically high levels”, Moody’s Investor Service said.
The ratings agency forecast smaller fiscal deficits in all GCC countries in 2017 compared with 2016, and said issuance volumes would remain elevated in 2017 “given that governments still need to fund sizeable deficits” and because, for now at least, market conditions remain favourable.
Following record levels of debt issuance on the international market by GCC sovereigns in 2016, Moody’s analysts anticipate a decrease in international bond issuance to around $32.5 billion in 2017 from $38.9 billion in 2016.
The ratings agency said movements in the oil price and global interest rates, together with endogenous factors like the extent of fiscal reform and funding strategies, will determine overall issuance needs as well as the impact on sovereign credit profiles. It argued that increased issuance on international debt markets poses longer-term credit challenges for the GCC.
“As the amount of outstanding external debt rises, refinancing could become more challenging for some GCC sovereigns, particularly if external liquidity conditions were to tighten,” it said. However, this will be a longer-term challenge given that the first wave of large roll-over needs will only materialise in 2021. In the UAE, the fiscal adjustment started earlier than in Qatar and Kuwait, with far-reaching subsidy reforms and capital spending cuts implemented as soon as 2015.
Fiscal expenditures in the UAE are expected to stabilise in 2017, with Abu Dhabi’s cuts offset by fiscal expansion in Dubai in preparation for Expo 2020. “We expect a fiscal deficit of 1.7 per cent of GDP in 2017.”
A sharp drop in oil prices in 2015-16, coupled with the limited depth of domestic markets and a favorable global interest rate environment, underpinned record aggregate international debt issuance by GCC governments in 2016. Record-high issuance in 2016 and early 2017 has also been helped by strong investor demand. “Successful issuance in such volumes is credit positive. It demonstrated that those sovereigns wishing to do so were able, individually and collectively, to access the international market in fiscally challenging times,” Moody’s said.
Analysts at the ratings agency noted that international debt issuance has helped to stem declines in foreign exchange reserves in many GCC countries, limited the drawdown on financial buffers, and supported domestic liquidity. “In addition, support in establishing a sovereign benchmark yield curve can facilitate international capital market access for non-sovereign issuers. We expect these trends to largely prevail in 2017.”
Jehad El Nakla, general manager at Moody’s Investors Service Middle East, said GCC countries are reaching a stage now where the short-term pain of fiscal and structural reforms is translating into what could be lasting gains. “While oil price volatility is easing this transition, the region’s players cannot rely on it to solve all their credit-related problems,” he said. The sharp drop in oil prices throughout 2015 and until early 2016 challenged the public finances of all GCC member countries. Moody’s estimate that the aggregate fiscal balance of GCC sovereigns turned into a deficit of around nine per cent of GDP in 2015-16, from an aggregate surplus of 4.8 per cent of GDP in 2014.
To finance these deficits, GCC governments drew on reserves, and issued in domestic and international debt markets. “However, because of the limited depth of domestic markets and in some cases increasingly limited domestic liquidity, a favourable interest rate environment and strong investor demand for GCC debt, international debt issuance played a material role in governments’ financing plans,” Moody’s said.
Prospects for GCC bond issuances in 2017 appear bright based on further funding requirement in the region by sovereigns and corporates as well as rising interest rates that would make bank lending costlier. Moreover, as economic growth is estimated to pick up, spending by corporates on M&A and capital projects is expected to also grow that would have a direct impact on fixed income issuances, according to Junaid Ansari, assistant vice-president at Kamco.
— issacjohn@khaleejtimes.com