Bond Market's Wrath Awaits Gulf Exporters Stung by Crude's Slump

  • Qatar plans to sell bonds to bridge $13 billion budget deficit
  • Middle East sovereign yields rose 78 basis points in 2015

It’s about to get a lot more expensive for Gulf region borrowers to fill the holes in their budgets caused by slumping oil prices.

Issuers in the six-nation Gulf Cooperation Council, including the governments of Saudi Arabia and Qatar, will probably find themselves paying 50 to 100 basis points more than current yields to sell bonds on global markets in 2016, according to Mashreq Capital DIFC Ltd., which manages the Middle East’s best-performing Islamic fixed-income fund. Oil’s 35 percent drop last year pushed yields to the highestin more than four years.

Saudi Arabia

The biggest Arab economy, for which oil income accounts for three quarters of government revenue, last month forecast a 14 percent cut in state spending in 2016 and said it will bridge its $87 billion budget deficit by selling local and foreign currency bonds.

The government borrowed 98 billion riyals from local banks and institutions through bond issues this year, according to estimates from Dubai-based investment bank Arqaam Capital Ltd. The retreat in energy prices led to a 50.5 billion-riyal ($13.5 billion) drop in demand deposits at Saudi banks in October from the previous month. The 4.7 percent slide was the biggest in percentage terms since at least 1993, when Bloomberg began collecting the data.

The cost of insuring the kingdom’s sovereign debt against default climbed to the highest since May 2009 on Monday after Saudi Arabia cut diplomatic ties with Iran in a dispute about an executed Shiite cleric. Standard & Poor’s cut the country’s credit rating by one level in October to A+, the fifth-highest investment grade, citing its widening budget deficit.

Bahrain

Bahrain’s government in November priced a $700 million long five-year bond at 5.875 percent. Its existing 10-year security due 2020 yielded 4.42 percent before the issue was announced, according to data compiled by Bloomberg.

"Issuers are going to be prepared to pay a wider spread in order to get sufficient traction in their transactions," said Doug Bitcon, a fund manager at Rasmala Investment Bank Ltd. in Dubai. "Liquidity is going to be more of a scarce resource in 2016 so that the natural conclusion that you need to come to are that spreads are going to be under pressure."

United Arab Emirates

The Emirates Interbank Offered Rate, a benchmark used to price loans, climbed 38 basis points last year to 1.05 percent as liquidity in the banking system tightened. National Bank of Abu Dhabi PJSC, the U.A.E.’s biggest lender, said government deposits slumped more than $13 billion in the 12 months to September.

U.A.E. bonds are trading with yields not seen since the so-called “Taper Tantrum" of 2013.

Qatar

Qatar will finance its 2016 budget deficit, which it forecasts to be $13 billion, by issuing local and international debt, Finance Minister Ali Al Emadi was cited as saying by state-run Qatar News Agency in December.

For GCC borrowers “the need for financing is there and it is going to continue to grow over the next two years," said Abdul Kadir Hussain, chief executive officer at Mashreq Capital.

Bond sales in the region dropped 22 percent in 2015 to $26 billion, according to data compiled by Bloomberg.

Kuwait

Kuwait’s budget deficit is expected to climb to between 5 billion dinars ($16.5 billion) and 6 billion dinars in this fiscal year to March. The country will sell dinar-denominated bonds to bridge the deficit, Finance Minister Anas al-Saleh said in September. It may also issue foreign-currency securities if needed, he said.

Oman

Oman, the biggest Middle Eastern oil producer that is not a member of OPEC, will post a budget deficit of 3.3 billion Omani riyals ($8.6 billion) in 2016, the Oman News Agency reported Jan. 1. The drop in oil prices forced the government to cut spending 15 percent in 2016 to 11.9 billion riyals, it said.

The government’s low indebtedness of about 5 percent of gross domestic product in 2014 gives it room to increase debt issuance to finance its budget deficit, Moody’s Investors Services said in a report in August.

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