Bonds Buy Time for Arab Oil States in for $900 Billion Shortfallby
Qatar said planning to follow Abu Dhabi with Eurobond sale
April busiest month for Middle East issuance since mid-2014
The let-up in oil’s two-year downward spiral is allowing Middle Eastern governments and companies to step back from raiding reserves and belt-tightening by reopening access to international capital markets.
Since Abu Dhabi’s $5 billion Eurobond last month brought an end to a drought that pushed issuance to a seven-year low in 2015, Qatar’s government, a real estate group in the country, a Kuwaiti bank and a United Arab Emirates investment company have been sounding out potential investors as the region’s borrowing costs drop to near the cheapest in six months.
The impending issuance is a sign the world’s biggest oil-exporting region wants to move away from plundering rainy-day funds to bridge the $900 billion of fiscal shortfalls the IMF estimates they will face through 2021. Though crude has rebounded more than 60 percent from its January troughs, it still languishes at less than half of 2014 prices. Saudi Arabia, which drained 20 percent of its foreign assets since then, is also on the verge of its first-ever global debt sale.
“Whereas last year the strategy was to cut spending, raise taxes and sell sovereign wealth fund assets, this year’s strategy is to borrow,” Richard Segal, a London-based emerging-market analyst at Manulife Asset Management Ltd., said by e-mail. “They waited for oil prices to stabilize before approaching the primary markets.”
April was the busiest month for Middle East bond issuance in two years, data compiled by Bloomberg show, turning a page on a 9 percent drop in volumes in 2015. Alongside the sovereign transactions, Qatari real estate group Ezdan Holding QSC is lining up its first dollar bond. Boubyan Bank KSC of Kuwait and Abu Dhabi’s Mubadala Development Co. have also met bankers and investors about proposed Eurobond transactions, with the latter set to sell $500 million on Monday.
The drive to borrow abroad also stems from liquidity drying up in the local banking sector, said Nicholas Samara, a Middle East debt capital markets banker at Citigroup Inc., this year’s biggest underwriter of debt sales for the region, including the Abu Dhabi deal. Fewer petro-dollars means lower private and public-sector deposit growth, reducing liquidity in the financial system, the International Monetary Fund said in an outlook for the region published in April.
“Liquidity from domestic banks, which has been a supporting factor for the region in the past, has become scarce, with banks becoming more selective in where they deploy their cash balances,” Samara said. “Potential issuers are now looking at other funding sources to finance their budget deficits.”
The IMF sees the region’s reliance on borrowing continuing into the next decade, predicting oil exporters such as Saudi Arabia and Bahrain will become "significant debtors" by 2021. In the five years to that date, the cumulative fiscal deficits of the six-nation Gulf Cooperation Council plus Algeria will reach almost $900 billion. The region’s economies are subject to a range of risks including vulnerability to a more hawkish Federal Reserve threatening to drive up their cost of financing again, the Washington-based fund said.
While Middle Eastern bond yields have slumped from a five-year high in January, according to a JPMorgan Chase & Co. bond index, the region has seen a series of sovereign credit downgrades this year related to pressure on finances from weaker oil prices. S&P Global Ratings has cut Saudi Arabia by three levels since October as the country has run down its foreign assets by $146 billion since early 2014. Moody’s Investors Service slapped a negative outlook on Qatar in March.
Bahrain had to annul a $750 million bond sale in February after S&P slashed the country’s rating to junk a day after the deal completed. It reopened a downsized sale several days later and paid a higher yield.
The current line up of bond transactions is being met with buoyant demand for now. Abu Dhabi’s tender attracted orders amounting to $17.5 billion, more than three times the amount on offer. Angelo Rossetto, a trader at GMSA Investments Ltd. in London, said he bought the emirate’s bonds last month and will consider bidding for Qatar’s new issue.
“We are comfortable with the Middle East risk,” he said. “Of course there is a high exposure to oil, but they have in place foreign investments and have diversified assets quite successfully over the last years.”