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Mena debt market slumps in year of Fed hikes and high oil prices

Reuters/Ahmed Jadallah
Analysts forecast Saudi Arabia will extend the voluntary cut for another month to include September
  • The value of debt sales has fallen 80% year-by-year to $18.3bn
  • Interest rate volatility has put off many potential bond issuers
  • GCC members are expected to post big budget surpluses in 2022

Debt issuance has plunged in the Middle East and North Africa this year, with interest rate volatility deterring would-be issuers and oil exporters’ huge fiscal surpluses reducing their need to offer bonds or sukuk. 

Mena debt sales in the first nine months of 2022 were $18.3 billion, down 80 percent year-on-year and the lowest total for the period since 2011, according to Refinitiv’s Mena Investment Banking Review. The number of debt issuances was 68 percent down on the same period in 2021.

“Since 2008, we’d been living in a very low interest rate environment but, given where inflation was going, everyone was anticipating a rate hike cycle this year,” said Murad Ansari, EFG Hermes managing director.

“Rate volatility has made it difficult for bond issuers to raise money because investors have all been looking to shorten their duration and the pricing environment has been a bit tough.”

Source: Mena Investment Banking Review, Refinitiv

Gulf central banks typically match US interest rates because their currencies are pegged to the dollar (the Kuwaiti dinar is pegged to a basket of currencies that includes the dollar). In March, the Federal Reserve launched its fastest rate-rise cycle in several decades, according to the World Economic Forum. The Fed has increased rates by around 2.5 percentage points over the past seven months to try to combat soaring inflation. 

So, if an issuer had sold a bond just before the flurry of hikes, offering a typical premium of 100 basis points for investment-grade fixed-income instruments, holders would now be receiving interest payments that were lower than the benchmark interest rate. 

“You’d be booking mark-to-market losses on your portfolio,” said Ansari. “That’s why investors haven’t been keen to buy anything with more than a one-year or perhaps two-year duration – they don’t want to be holding a five-year bond at a rate which is likely to change. [It’s] one of the key reasons why the pricing environment and investor appetite has been the way it is.”

Oil price rises and GCC surpluses

The GCC countries excluding Kuwait are forecast to post a combined surplus of $50bn in 2022, according to the ratings agency Moody’s, which based its projection on an average oil price of $75 per barrel.

That compares with a surplus of $13bn in 2021 and a deficit of $112bn in 2020, the agency estimates. In Saudi Arabia alone, the Ministry of Finance is predicting a surplus of about 90bn riyals ($24bn) this year.

So, GCC sovereigns have less need to raise debt. “Some sovereigns are looking to repay existing bonds early. There’s little impetus to borrow money at current interest rates,” said Ansari. 

“Gulf sovereigns which do issue debt will probably be doing so to maintain a yield curve or to replace existing bonds that have an upcoming maturity.”

The UAE accounted for 61 percent of debt sold in the first nine months of 2022, Refinitiv estimated, followed by Saudi Arabia (23 percent), Qatar (5 percent) and Bahrain (5 percent). 

Government and related entities sold $3.9bn, down 84 percent year-on-year, while financial institutions’ $12.4bn represented a 70 percent annual fall. 

“The decline in issuance this year is also because it’s coming from a high base – a lot of companies and government institutions issued debt to help them through the pandemic,” said Lucille Jones, deals intelligence analyst at Refinitiv. 

“Bond issuance and M&A are closely related. M&A tends to be a driver of debt activity because companies will sell bonds to help fund acquisitions,” said Jones, adding that higher borrowing costs in turn deter M&A deals. “They very much influence each other.”

When will the forecast change?

The decline in Mena bond issuances will extend until at least the first quarter of 2023, according to MR Raghu, CEO of Kuwait’s Marmore Mena Intelligence.

“Bond issuances from the region [will] remain muted for the next six months,” he said.

EFG’s Ansari believes issuers will return when rates stabilise.

“From Mena corporations, whoever needs to raise [money] will do so,” he said. “Most people expect to get more visibility in Q1 2023 as to when rates will peak. Then, we’ll have an environment where issuers are more comfortable with pricing and fund managers will be keen to take a look.”

Yields on 10-year US treasuries – the benchmark against which other bonds are often priced – increased by about 30 basis points from October 18 to 20. They have been fluctuating by around 15 basis points daily.

“This kind of volatility is rare in the bond market,” said Ansari. “Issuers, or would-be issuers, will be looking for when the Fed pivots. At this point in time, the consensus is for at least one more rate hike of around 75 basis points.”

Decent returns again

The S&P GCC Bond Index and the broader S&P Mena Bond Index are both down just over 20 percent this year, while global bond indices have also tumbled as bond prices and interest rates are inversely correlated.

Yet these declines will have little impact on investor appetite for new Mena debt, said Ansari.

“People are now getting excited at bonds paying a decent return again – we haven’t seen returns of 5-6 percent for a long time, especially on investment-grade debt,” he added.

“Given where rates are, more liquidity is moving towards bond funds. There are more money allocations from high-net-worth investors and even institutions towards bonds because yields are becoming attractive. New issuances, given that we know rates to be attractive to investors, will continue to attract liquidity.”

Excluding the global financial crisis, absolute yields on GCC bonds are near 20-year highs, according to investment manager Franklin Templeton.

In an October 18 note, it wrote: “We see current valuations as compelling, particularly for higher-quality issuers.” 

The attractiveness of Mena debt depends on several factors including regulation, the depth of fixed income markets and sophistication of the instruments, according to Marmore’s Raghu. 

“The GCC’s economic stability and relatively high investment-grade ratings remain favouring factors for international investors interested in GCC fixed-income instruments,” he added. 

Largest deals of 2022

Proceeds $bnIssuer
Domicile nationMacro sectorCurrency
Issue date
3United Arab EmiratesUAEGovernmentUS dollar06/23
1.6Islamic Development Bank Trust Services
No 2
Saudi ArabiaFinancialsUS dollar04/21
1.49Mamoura Diversified Global Holding Global Medium Term NoteUAEFinancialsUS dollar03/21
1.04National Shipping Company of Saudi ArabiaSaudi ArabiaIndustrialsSaudi riyal07/05
0.75Dubai Islamic Bank SukukUAEFinancialsUS dollar02/08
0.75Riyad Tier 1 SukukSaudi ArabiaFinancialsUS dollar02/09
0.75Sharjah Sukuk ProgrammeUAEFinancialsUS dollar03/28
0.7Sweihan PV Power CompanyUAEEnergyUS dollar01/13

Source: Mena Investment Banking Review, Refinitiv

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