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Abu Dhabi, UAEMonday 25 June 2018

GCC corporate and infrastructure issuers to double debt sold

S&P Global Ratings expects that sales of bonds and sukuk to continue next year 

An investor monitors a screen displaying stock information in Riyadh, Saudi Arabia. Faisal Al Nasser/Reuters
An investor monitors a screen displaying stock information in Riyadh, Saudi Arabia. Faisal Al Nasser/Reuters

Companies and government infrastructure projects around the region are set to double the amount of debt this year they will sell in capital markets versus last and will continue to sell bonds and sukuk next year to plug persistent holes in budget deficit despite a rebound in oil prices, according to S&P Global Ratings.

"For Gulf Cooperation Council corporate and infrastructure capital market issuance, 2017 is shaping to be a bumper year," said Tommy Trask, a Dubai-based primary credit analyst at S&P.

"Volumes are already more than double those of last year – with almost two months still to go. As central banks hike interest rates along with the US Federal Reserve, and with significant political uncertainty over the region, issuers are keen to lock in long term funding at still attractive rates. With government deficits remaining substantial, we expect this trend to continue into 2018."

The rating agency did not give any figures for what they expect the value of those issuances to be but said that the bulk of those issuances were likely to be bond rather than sukuk after Dana Gas refused to honour payment of its sukuk on the basis that the issue was not Sharia-compliant.

"It remains unclear what ramifications this will have for future corporate sukuk issuance and ... whether the market will write this off as an idiosyncratic event linked to a specific issuer or something with wider ramifications for the asset class," Mr Trask said in the report.

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Regional governments have been selling international bonds and sukuk, in the case of Saudi Arabia for the first time, at a more accelerated pace in recent years in a bid to plug holes in their budgets caused by lower oil prices.

Governments in the oil-rich Arabian Gulf had not tapped the bond market in any significant way until last year. Most countries in the region had maintained budget surpluses before the crash in the price of oil that began in the summer of 2014, during which oil shed more than 70 per cent of its value.

That drop in the value of crude oil, the lifeline for many countries in the region, changed the equation, with the result that 2016 was a record year for regional bond issues in the region, with over US$60 billion worth of fixed income sold.

That has caused excitement among long-term investors who are seeking to diversify their bond portfolios from a relatively stable part of the world that offers attractive yields at the moment.

Of those sales last year, Saudi Arabia sold $17.5bn worth of bonds in its first international sale and Qatar sold $9bn.

That selling comes even as rising yields as political tensions in the region causes some jitters among investors. S&P noted that bond and sukuk yields had risen 50 basis points year-on-year but that was unlikely to have a material ratings implication. Nor is it likely to dent appetite for going to the capital markets for debt at a time when rates are still low, the rating agency said.