Bonds to expand in 2024 as governments plug shortfalls

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• Gulf bond issuance up 74 percent
• Saudi Arabia uses bonds for deficit
• Spreads on Gulf bonds at historical low

Gulf bond issuance this year will exceed that of 2023-24 as governments borrow to bridge budget shortfalls and tight spreads persuade more corporations to raise debt, according to experts.

Gulf bond issuance in 2023 was $64.7 billion, up 74 percent year on year, according to data from Refinitiv. Yet last year’s total was still down versus annual issuance for 2016-21.

Issuance in the broader Middle East and North Africa region, which includes the Gulf, was $69.9 billion in 2023, up 83 percent year on year.

The number of new bonds sold fell in both the Gulf and Mena, despite the increase in their combined value, Refinitiv data shows.

Saudi Arabia this month issued $12 billion of bonds in a three-part issuance that was heavily oversubscribed.

• Qatar to launch its first bond issuance in four years
• Larger deficits unlikely to trouble Saudi debt access
• GCC companies lead early sukuk moves in 2024

“For Saudi Arabia, it is mainly about meeting the borrowing needs for this year,” said Manuel Al Mutawa, a fixed income portfolio manager at Sico investment bank in Bahrain.

Saudi Arabia forecasts its 2024 budget deficit will be SAR 79 billion ($21.1 billion). Sico estimates that 40-50 percent of the kingdom’s borrowings this year will be in so-called Eurobonds, which are sovereign bonds issued in a foreign currency, usually US dollars.

“Nevertheless, there’s a good chance that total borrowing exceeds the official figure as the government may look at pre-financing some of [its bond] maturities in 2025 and [it] also depends on the willingness to maintain oil supply cuts,” said Al Mutawa.

Spotlight on Sharjah

Sico also expects Sharjah, the second-biggest emirate in the UAE by population, to expand its bond issuance in 2024 after it approved a record annual budget.

“Sharjah has become a regular issuer and hence we expect some combination of Eurobond, local currency and private placements although the emirate may start with the latter given that they have traditionally been very price sensitive,” said Al Mutawa.

He described the pipeline for new corporate bond issuance as “quite healthy”, with banks First Abu Dhabi and Kuwait Finance House already having sold sukuk this year.

Several government-owned entities such as Abu Dhabi’s Mubadala and Saudi Arabia’s Public Investment Fund are also expected to raise new debt.

Overall, regional debt issuance this year should exceed 2023 as Gulf countries’ fiscal balances weaken and push them to borrow, said Al Mutawa.

“Slower growth, lower commodity prices and, in some cases, higher expenditures” are prime causes of these deficits, he said.

Bonds retain appeal

The S&P GCC Bond Index is up 2.52 percent in the 12 months to January 15 following a two-month rally from late October.

The combined par value of the index’s constituent bonds was $267.5 billion, the average weighted maturity was 12.99 years, and the par-weighted coupon was 3.83 percent.

Although oil and gas prices have declined from the highs of 2022-23, Gulf sovereign bonds remain alluring to international fixed income investors seeking exposure to dollar economies with high credit ratings, said Robin Marshall, director of global investment research at FTSE Russell in London.

“They’re attractive credits in that regard and in a falling yield environment, risk appetite can be really strong,” said Marshall.

Spreads on Gulf bonds versus US treasuries are at historically low levels, according to Al Mutawa.

“We expect some leeway for GCC spreads to grind higher especially as a flurry of GCC issuances should put some pressure on the secondary market prices,” he said.

Higher yield

Long-anticipated US interest rate cuts will spur investors to withdraw cash from interest-bearing savings accounts and reallocate some of this money to higher-yielding bonds.

In terms of bond buyers, local investors favour corporate and high-yielding bonds, said Al Mutawa, while international investors dominate investment grade debt.

Local investors prefer bonds with less than 10 years’ duration. International buyers favour longer tenors, with Gulf bonds often more attractive than other emerging market debt due to the region’s robust credit ratings, dollar pegs and strong government support, Al Mutawa added.