Large GCC sovereigns are expected to tap debt markets in 2018, study shows

The Gulf Cooperation Council (GCC) states will play a prominent role in new debt issuances market in 2018, with the trend of large sovereign and quasi-sovereign issuance set to continue, according to a report on GCC fixed income market by Emirates NBD Asset Management and Fisch Asset Management.

“Our projection is that the widely-expected stability in Brent crude prices should provide some reprieve to sovereign balance sheets, but is unlikely to address the deficits that will be sustained in 2018,” Usman Ahmed, head of investments at Emirates NBD Asset Management, said in the report.

“Net new issuance may increase, which will test current strong market technical,” he added.

The growth of GCC’s debt investor base is expected to continue this year, with demand coming from the record inflows to emerging markets and supply provided by "very real" diversification needs of the region.

The GCC bond and sukuk market achieved an all-time high issuance of $70 billion in 2017 with 70 percent of all issuances coming from sovereigns, despite geopolitical instability, a spate of sovereign rating downgrades and investor fears that higher oil prices could dampen governments’ commitment towards economic reform.

Additionally, international investors have gained better access to the GCC bond market through hard currency issuance as the Gulf region dominated the segment over Russia and Turkey in 2017. In fact, four of the top five “jumbo deals” (over $5 billion) in emerging markets came from GCC sovereigns —two from Saudi Arabia, one from Abu Dhabi and one from Kuwait, the report said.

In the Shariah-compliant debt market, GCC issuers raised $2.25-billion between June and December 2017, with more issuances likely over the next 12 months.

Separately, convertible bond issuances would see an uptick to meet rising investor demand. Over the decade, 20 issues, totalling $23 billion, have been launched, the report added.