28/12/2016 07:53 AST
GCC sovereign issuance has been particularly strong this year, with Qatar, Abu Dhabi and Oman all issuing in May, while Saudi Arabia’s debut bond raised a record $17.5bn in October, a recent report by Samba Financial Group shows.
“Further issues are likely next year, although costs will rise,” Samba said.
GCC sovereign international bonds have been hit by the global re-pricing of fixed income following Donald Trump’s election victory in the US and the global reflation trade, it said.
Secondary market prices have dropped and yields have risen, in some cases quite markedly. However, spreads look to be tightening as oil price prospects improve. Having spiked early in the year, market risk perceptions have also generally improved as reflected in declining credit default swap (CDS) spreads.
While still elevated, pressures in forward exchange rate markets have eased since they spiked early in the year. The Saudi and Omani currencies have been subject to the most strain, but there appears little prospect that long-standing GCC exchange rate pegs to the US dollar will be broken, Samba said.
Governments in the region have moved quickly and convincingly to put fiscal and current account balances back on a sustainable path, and should be aided by an expected revival in oil prices next year.
Given the dollar pegs, Samba expects the Gulf Cooperation Council central banks to follow the US Federal Reserve in raising policy rates. This will feed into higher interbank rates, although improving local liquidity conditions may offset some of the impact on current rates.
These have generally risen in line with US rates so far this year, except in Saudi Arabia where liquidity strains saw three-month SAIBOR double to almost 2.4%. However, rates have since fallen back towards 2% as the government shifted towards external borrowing to fund its deficit, taking the strain off banks and injecting some liquidity back into the system.
GCC equity markets have struggled this year, with only Dubai and Oman managing to post gains through November, Samba noted. Weak oil prices and associated fiscal consolidation and economic slowdown have been the main headwinds, accentuated by bank liquidity concerns. This has been particularly true in Saudi Arabia.
However, the Tadawul has recently surged following the successful issuance of the kingdom’s first ever sovereign bond, and subsequent moves to clear state payment delays, and to ease bank liquidity constraints. Investor confidence has also been boosted by expectations of higher oil prices in the wake of the Opec deal to cut production.
Gulf Times
Please wait...
