Stable credit profile, higher oil price fuel demand for GCC bonds

Investor confidence in the Gulf Cooperation Council (GCC) bond market is on the rise with bond issuance reaching $16.8 billion in the first quarter 2018, according to Marmore Mena Intelligence.

“Oman has managed to sell its largest-ever sovereign bond worth $6.5 billion in the face of multiple downgrades in credit ratings from companies like Moody’s and Fitch in 2018.  All of these show that although there exist certain challenges for GCC bonds, there is a growing demand for them from investors across emerging and developed markets,” it added.

GCC bond markets have seen a surge in foreign investment in the past two years. The total bond issuances in the GCC reached $70 billion, an all-time high, in 2017. More than 75 percent of the issued bonds (mainly sovereign bonds) were absorbed by non-GCC investors last year.

With an approximate 12 percent share in Bloomberg Emerging Market Investment Grade Bond Index, GCC bonds have occupied centre stage in the debt market landscape, the report said, adding, “stable credit profiles, low debt levels and rising oil prices have increased the appetite for GCC bonds”.

Further, the bonds are priced attractively with yields that are higher than that of their similarly rated peers. According to the report, Saudi Arabia 30-year bond maturing in 2047 yields 30 basis points higher at 5.07 percent than Indonesian bond (30 year, 4.78 percent) which has a lower credit profile compared to the Kingdom.

“One primary reason for higher yield is due to the risk premium associated with the GCC bonds for heightened political risk,” Marmore said.

Among major developed economies such as Europe (almost 60 percent of sovereign bonds) and Japan have negative yields and investors are looking for bonds with positive yields, which is driving the demand for GCC bonds, the research firm revealed.

Meanwhile, the GCC countries have begun implementing structural reforms. Some of these changes include developing independent regulatory, statistical, budgeting and auditing bodies for public sectors.

"This will lead to increased investor confidence in the regional bond market. This will also bring about a wide range of economic benefits that would ultimately result in better credit ratings and translate to a lower cost of borrowing for the issuers," Marmore said.

According to the report, a recent milestone achieved to develop domestic debt market is the listing of more than SAR 200 billion of government and sukuk bonds in the stock market by Saudi Arabia.

"This will help in the secondary bond market, bridge fiscal deficit for the country and reduce reliance on banks for debt. It will also help in making transparent benchmark prices for bonds in KSA," the report stated.

Besides, factors such as increased foreign investment, impressive performance by bonds and improved structural reforms augur well for strong interest and surging investor appetite for bond issuance from the GCC region, the consultancy said.

However, there are certain concerns that might impede the growth of issuances and primary among them is the absence of regional harmony, which has increased credit market volatility, and the possibility of future US Fed rate hikes.