Investor appetite for GCC debt to remain strong in 2019: report

Demand for hard currency bond and sukuk issuances in the Middle East and North Africa (MENA) region will remain high after total issuances last year reached $84 billion, according to a recent white paper.

Investor appetite is likely to remain strong in 2019, as Gulf Cooperation Council (GCC) bonds are included in the JP Morgan Emerging Market Bond Index series and regional governments sustain ambitious reform agendas, the paper co-authored by Emirates NBD Asset Management, Kamco Investment Company and Fisch Asset Management, said.

Total issuance increased to $145 billion in 2018, compared to a 5-year average of $150 billion, following the inclusion of local currency issuance from the MENA region, the paper stated.

Saudi Arabia led with $32.4 billion worth of issuances followed by Qatar at $29.1 billion and UAE at $28.2 billion. 

The GCC has already delivered $9.1 billion in issuance this year from both sovereigns and corporates, including the Saudi sovereign, First Abu Dhabi Bank (Sukuk) and Dubai Islamic Bank (AT1), setting the scene for the rest of the year.

While regional bonds look attractive on a ratings-adjusted basis against other emerging markets, the paper highlighted a range of important considerations for investors such as geopolitical uncertainty, possible rating downgrades, increased supply carrying the risk of a glut outstripping demand and the region’s over-reliance on oil as a revenue source.

“Last year, GCC-fixed income provided a safe haven during a sustained EM sell-off period. For 2019, we think risks are more balanced, and investors will need to be more discerning in credit selection," said Parth Kikani, Director Fixed Income, Emirates NBD Asset Management.

Meanwhile, the paper said that financial markets in the MENA were evolving at a fast pace and more outward-looking policies aimed at integration with global markets were increasing the breadth of financial instruments traded in the region, giving international and local investors compelling reasons for exposure.

“Regional gross government debt as a percentage of GDP increased from 29.7 percent in 2014 to 44.4 percent in 2018, after a series of issuances. Fiscal deficits for most MENA countries have been the reason for an increase in government debt, and this trend is expected to continue in 2019 — providing a fresh set of opportunities for investors," said Faisal Hasan, Head of Investment Research, Kamco Investment Company.