QNB Group: GCC Utilisation of Bond Markets is Growing

Doha, November 24 (QNA) – There is US$233bn in debt securities issued in the GCC in circulation, based on Bloomberg data, equivalent to 17% of the region’s GDP. This is a relatively low level compared with advanced economies where government bonds alone often amount to over 100% of GDP.
According to analysis by QNB Group, this debt includes US$17bn in central bank T-bills (short-term debt instruments that are generally used to manage domestic liquidity) and US$216bn in longer-term bonds and sukuks (the Sharia-compliant equivalent).
Most of the bonds issued in the GCC are denominated in foreign currencies (US$170bn in Q2 2012, according to BIS data), mainly US dollars. A key reason for this is that all of the GCC countries, bar Kuwait, have currencies that are pegged to the dollar at a fixed rate. Outstanding GCC foreign bonds have grown at an annual rate of 21% since Q1 2007.
This rapid growth has happened partly to compensate for the decline in international syndicated loans, which fell from US$112bn in 2007 to US$32bn in 2011 and just US$8bn in the first half of 2012. This decline is most probably a result of global banks, particularly European ones, reducing their international exposure following the 2008 financial crisis. Therefore, governments and corporations in the GCC have increasingly looked to the bond markets as an alternative source of financing for the substantial projects and corporate expansions underway in the region.
Bond markets are an attractive source of financing for a number of reasons. Long-term bonds are well matched to the long-term nature of the capital investments governments and companies are undertaking. Additionally, bond yields have reached record lows, making them a low-cost source of financing.
For example, in November 2012, a US$1bn, 5-year note from QNB Group was issued with a coupon of 2.125%. This was the lowest ever coupon for a financial institution in the GCC, reflecting the high confidence of investors. This issue was part of a US$7.5bn medium term note programme initiated by QNB Group to: widen its investor base; reduce the mismatch in assets and liabilities; and to fund growth opportunities.
T-bill issuance in the GCC has also risen, particularly due to increased use of them by Kuwait and Qatar to manage domestic liquidity and support the development of capital markets. Saudi Arabia, Bahrain and Oman also issue T-bills and the UAE is planning to in the near future.
The largest GCC bond market is in the UAE, which accounts for 45% of outstanding bonds in the region and 27% of GDP. This is because the UAE has a longer history of debt financing for major projects than other countries in the region.
Issuance of new bonds in the GCC reached US$38bn for 2012 as at 20th November, slightly below the US$45bn issued in 2011. This was due to lower government issuance. In 2011, Qatar had issued almost US$19bn in sovereign bonds and sukuks in 2011, compared to only US$4bn in 2012, to help build a yield curve to support local capital markets.
However, corporate debt issuance has risen strongly in 2012, accounting for 75% (US$29bn) of new bond issuance, more than double the corporate bond issuance of US$14bn in 2011. 
The largest issue was a 10-year US$4bn sukuk from Saudi Arabia s General Authority for Civil Aviation. It was the Kingdom’s first government-backed issue and was priced with a coupon of 2.5%, providing a broad indication of the local currency risk-free rate. Given that US$500bn of infrastructure spending is planned in Saudi Arabia over the next five years, the Kingdom’s debt market is likely to grow rapidly.
Dolphin Energy, a UAE-Qatar gas pipeline company, issued a US$1.3bn bond in February 2012 to refinance existing debt.
Abu Dhabi Islamic Bank issued a US$1bn sukuk in November 2012 to shore up its core capital ahead of the implementation of Basel III standards. The sukuk was the GCC s first perpetual bond with no stated maturity.
QNB Group expects that regional companies will continue to drive bond issuance higher in 2013 for a number of reasons. Firstly, tapping debt markets has the benefit of broadening the investor base of GCC companies. Secondly, companies will be keen to take advantage of the prevailing low interest rate environment. Thirdly, strong growth is expected in the GCC, which will drive continued demand for project financing. Fourthly, the global ambition of leading regional companies will continue to drive their international expansion, sustaining demand for financing. Fifthly, many companies will need to refinance existing debt issues, particularly in the UAE. Finally, as the introduction of Basel III standards gets closer, more banks in the region could look at raising core capital through debt issuance.
GCC sovereigns have relatively high ratings, with a growing number of institutions obtaining a credit rating. This makes most GCC companies well positioned to enter the bond market and obtain relatively favourable financing terms. Furthermore, from the perspective of global institutional investors, the strong rating of GCC sovereigns and companies provide attractive opportunities for portfolio diversification. (END)

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