Gulf's $24 Billion Bond Bonanza Meets Cash Need in Cheap Oil Era

  • GCC bond sales have had the best start to the year ever
  • Syndicated loans have declined 73%, the worst start since 2010

Middle East international bond sales are off to the strongest ever start to a year as borrower demand for funds outstrips the firepower of local banks in an era of depressed oil prices.

Hard-currency bond issuance from the six-nation Gulf Cooperation Council, which accounts for the bulk of the region’s capital markets and includes Saudi Arabia, its largest economy, more than quadrupled in the first quarter from a year earlier, according to Bloomberg data. In contrast, syndicated lending, traditionally the preferred source of capital for GCC borrowers, is having its worst year since 2010, declining 73 percent in the first three months of the year.

"It is mainly the sovereigns that have issued this year and they are very conscious about not sapping liquidity in the local banking system so that access to credit to the small and medium sized companies is not hindered," said Anita Yadav, head of credit research at Emirates NBD PJSC, Dubai’s biggest bank. "Bonds offer longer tenor, large amounts of funding at reasonable prices and attract international liquidity."

The switch to bonds shows a decade low in oil prices touched in January 2016 is still reverberating through the Gulf’s financial system after governments drew down bank deposits to prop up spending previously funded with energy export revenues. In Saudi Arabia, deposits of state entities fell 10.3 percent in 2016, according to central bank data, while in the United Arab Emirates, government deposits declined 3.8 percent in 2015, before recovering 1.9 percent the following year.

Quarterly Surge

GCC bond sales in the first quarter surged 359 percent to $24.2 billion, helped by an $8 billion debut issue from the Kuwait government and a $5 billion offering from Oman, according to data compiled by Bloomberg. Bahrain raised $600 million in February, while Saudi Arabia is poised for its first offering of Islamic bonds in the international market.

The percentage increase in bond sales this year is inflated by a very poor first quarter in 2016 when the plunge in crude prices to the lowest in 13 years pushed GCC spreads wider and led many issuers to postpone sales. Later in the year, sales recovered to a record $72 billion, helped by a $17.5 billion debut issue from Saudi Arabia, the biggest ever by an emerging-market nation.

Robust Start

While, bond sales have got off to a robust start to 2017, syndicated loans have raised only $7.3 billion this year compared to $26.4 billion in in the same period a year earlier, according Bloomberg data. In all of 2016, syndicated loans rose 9.8 percent to $103 billion.

The Middle East’s adoption of the international bond market is probably here to stay, according to Andy Cairns, group head of corporate finance at National Bank of Abu Dhabi PJSC, the U.A.E.’s biggest lender. Oil prices remain below $60 a barrel and the region’s governments will continue to finance budgets by tapping foreign investors.

"We should consider it the new normal as the region becomes accustomed to operating in the current oil price zip code," he said. "The significant jump in fixed income volumes that we saw in 2016 is not an aberration."

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