Market Analysis: Lift-off for GCC Bonds and Sukuk
Lower hydrocarbon prices have created challenges across the region but also opportunities. One of these is an accelerated evolution of regional debt capital markets. Since 2016, virtually all of the GCC sovereigns have raised funds in international markets, first via syndicated loans and now consistently in the capital markets. As a result the Middle East is now firmly on the global map of emerging market issuance centres.
The region contributed over 14 per cent of the total emerging market capital market issuance in 2016, including the largest single issue ever, a US$17.5 billion mega bond issue by Saudi Arabia. There may not be quite the same volume this year, but the significant point is that GCC bonds and sukuk have arrived on the world stage in a big way.
But government issuance is about much more than raising funds. By drawing attention to the region and allowing investors to price country risk, the states have invested in a valuable piece of virtual national infrastructure, their own yield curves – against which GCC companies can price their own instruments in the market.
There is also an increasing recognition that while international markets can offer large funding volumes, they may shut down from time to time for reasons unrelated to our region. That is one reason why the savvy new breed of debt managers is paying attention to developing local currency markets. Robust local government markets create risk-free yield curves that deepen the financial market, which in turn enhances the credit profile of the GCC states and sendsa reassuring signal to the global financial community.
While there is no one size fits all policy for local government debt markets, there are some good practices. Markets thrive when governments issue simple instruments at a true market-clearing price consistently and across the time horizon. International investors bring liquidity when that may be lacking locally. When there is consistency and size in the primary market, then a secondary market can develop.
Companies and projects are also increasingly opting for capital markets sometimes at the expense of syndicated lending, long considered less expensive and easier to access.
A lot of positive externalities come with this. Companies can achieve longer tenors and benefit from the rigours of the capital market experience, involving prospectus disclosure, due diligence and investor meetings all aimed at achieving better pricing. And preparing for disclosure may prompt constructive changes in management and governance that promote the long-term interests of the company and its stakeholders.
The Gulf Capital Market Association and its members are working on innovations to take the market to a higher level such as securitisation, hybrid sukuk, green bonds, new sukuk indexes and strengthening the institutional investor base by promoting pensions and insurance reforms.
Regional regulators for their part are extremely positive on the market and are engaged in making it more attractive for companies and projects to access the market. New and upcoming regulations will reduce administrative burdens, lower costs, streamline approvals and provide more flexibility for issuers. Meanwhile, welcome improvements in bankruptcy legislation, long-awaited, are appearing.
All of this will help to facilitate the investments needed in everything from water and power to transportation to soft infrastructure such as schools and health facilities to keep the region’s economy humming and transitioning to a post-oil future.
Michael Grifferty is president of The Gulf Capital Market Association