Why government-related debt is worth a punt

• GRE debt worth £35bn so far this year
• Offers better spread than sovereign debt
• Strong investor demand

Debt sales by government-related entities (GRE) in the Gulf, such as Saudi Electricity Co and Abu Dhabi’s Mubadala Investment Co, offer better investor value than their sovereigns, experts say.

Gulf foreign currency sales of conventional and sukuk (sharia-compliant bonds) rose 9 percent to $72.4 billion in the five months to May 31, compared with the same period last year, data from London Stock Exchange Group (LSEG) show.

In contrast, local currency debt offerings plunged almost 70 percent to $15 billion over the same period.

Of the total $87.5 billion, GREs accounted for 40 percent, or close to $35 billion, half of which came from Saudi Arabia, says Nadim Amatouri, director of credit research at Dubai’s Arqaam Capital.

The kingdom’s Public Investment Fund (PIF) and Saudi Aramco sold $10.25 billion of debt between them, while UAE-based GREs including Abu Dhabi sovereign funds Mubadala and ADQ sold about $13 billion, Amatouri estimates.

“There is good value in some Abu Dhabi GREs,” says Amatouri. “Mubadala, Taqa and ADQ offer [a spread of] 30 to 60 basis points over Abu Dhabi government debt.”

Government-run Saudi Electricity offers a 25-to-30 basis point pick-up over Saudi sovereign debt and is “good value”, says Amatouri. However, “we see less value in Aramco or PIF debt”.

Unlike traditional bonds, which involve interest payments, sukuk are structured to generate returns to investors, often based on profits from underlying assets.

A bond’s spread is the difference in yield — measured in basis points — between the bond and its benchmark. Dollar-denominated emerging market debt is typically priced at a spread over 10-year US Treasury yields, reflecting the additional risk investors take on.

As such, Mubadala and ADQ bonds offer a premium over Abu Dhabi government debt even though these entities are wholly government owned.

“We also see value in [state-owned] Qatar Petroleum longer-dated debt offering a decent pick up of 25 to 45 basis points over Qatar sovereign [debt],” says Amatouri. “Several Oman-based GREs offer up to 50 basis points over the sovereign.” 

About $45 billion to $50 billion of bonds and sukuk in the Middle East and North Africa will mature this year, around half of which was sold by sovereigns, Amantouri says.

This debt should mostly prove straightforward to refinance.

“There is extremely strong investor demand for new Gulf corporate and sovereign sukuk and bonds,” says Zeina Rizk, partner and co-head of fixed income at Dubai’s Amwal Capital Partners. 

• Oman’s $83m treasury bonds snapped up by investors
• Saudi Arabia targets $12.6bn from bonds for rest of 2025
• Oman raises $130m from latest sale of treasury bills

She cites oversubscriptions for sales by the likes of Abu Dhabi state oil company Adnoc and Dubai property developer Omniyat.

“There has never been a better time to invest in fixed income than right now,” says Rizk.

“Usually in periods of economic volatility, short-term yields are low and as such there’s little protection from any downside or spreads widening.

“Currently, however, the absolute return of short-term bonds is very high, so you’re being paid to wait, and if spreads do widen you would still have a significant cushion that should keep your returns positive.”

Oman’s refinancing

Oman is among the sovereigns expected to refinance. The sultanate had $2.4 billion of debt maturing in 2025. 

Of this, it has already repaid a $900 million Eurobond from its foreign currency reserves while a $1.5 billion sukuk matures in October.

Oman slashed its debt-to-GDP ratio to 35 percent in 2024 from 64 percent in 2020, as it repaid debt – thanks to higher oil revenue – and cut state spending.

Brent crude is down 15 percent this year, trading at about $66 on Monday, while Oman’s breakeven price for its current account is about $75. 

As such, the country will probably record a current account deficit in 2025.

“It makes more sense to pause on the de-leveraging and roll over maturing debt to avoid putting additional pressure on foreign currency reserves,” says Amatouri.

In May, Bahrain issued a three-year, BD250 million ($665 million) bond, which was more than two times oversubscribed.

Bahrain is the most indebted of the six members of the Gulf Cooperation Council, equivalent to about 130 percent of gross domestic product. The IMF has urged it to reduce debt and spending.

“Bahrain is weaker than Oman on an economic fundamentals perspective, so if Bahrain can attract sizable oversubscription levels, then Oman shouldn’t have any problem placing dollar bonds either,” says Rizk.