23 October 2019

Booming Bond Market Fuels Diversification Drive

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Record levels of debt issuance by Middle East and North Africa (MENA) governments are

playing a critical role in the diversification drive across the region.

In 2016, Saudi Arabia became the new “Bond King” when it launched the biggest-ever Emerging Market Sovereign Issuance (EMSI), with a $17.5 billion bond sale.1

To date, Saudi Arabia, Qatar, United Arab Emirates (UAE), Bahrain and Kuwait all became eligible for the EMBI Global Diversified2 (EMBIGD), EMBI Global (EMBIG) and EURO-EMBIG indexes, raising the regions profile and beckoning international investors.

 

GCC countries now represent around 17.1 percent of EMBI Global Diversified and EMBI Global series; estimated index inclusion will generate US$55 billion this year, according to HSBC.

The upgrade has boosted MENA’s states weighting in the EMBI to just around 20% by the end of September, compared to 6% at the end of last year.

 


  Total Government Gross Debt for Selected MENA states

(Percent of GDP)

 

2000–15

2016

2017

2018

2019

2020

Bahrain

30.6

81.3

88.2

93.4

100.2

103.6

Kuwait

12.8

10.0

20.7

14.8

17.8

21.0

Oman

11.8

32.5

46.9

50.9

61.3

63.1

Qatar

31.2

46.7

49.8

48.4

52.7

45.9

Saudi Arabia

34.6

13.1

17.2

19.1

23.7

25.4

UAE

11.5

20.2

19.7

18.7

19.2

19.0

Egypt

82.1

96.8

103.2

92.6

86.9

84.6

Source: International Monetary Fund

 

Bonds in the billions and soaring sukuk’s

The inclusion in EMBI has raised GCC bonds’ profile among international investors and increase the size of the investible emerging-market universe.

This scale of primary issuance creates much deeper credit markets, which helps governments and corporates raise capital via the bond markets in the future.

Over the past 4 years international allocations have averaged at 50-60% which means over $200 billion of inflows into the region, according to HSBC.

Corporations are also tapping debt markets. Earlier this year, Saudi Aramco’s3 $12 billion bond was oversubscribed to the tune of $100 billion, in a record breaking vote of confidence.


Middle East corporations are also looking to go green and experimenting with hybrids. For example, HSBC was the sole green structuring adviser for Majid Al Futtaim who issued the the world’s first benchmark-size Green Sukuk by a corporate.

HSBC is in the privileged position of leading these types of landmark issuances and has recently won the Middle East Best Bank for Sustainable Finance at the Euromoney Awards for Excellence 2019.4

This year the MENA entities could raise as much as US$139 billion between international and local issuances, according to a report by S&P Global Ratings. Close to 44% of the borrowing in 2019 will go toward refinancing maturing long-term debt, resulting in an estimated net borrowing requirement of $76 billion, the report found.

“Most GCC countries have been tapping international debt markets in recent years to meet their funding needs, diversify funding sources, and reduce liquidity pressures in the domestic banking systems,” S&P said.

This might be the tip of the iceberg. S&P Global5 believes GCC countries will need to raise US$300 billion in debt between 2018 and 2021, as they rollout multi-billion infrastructure and strategic projects.

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