High premium keeps consumer demand lukewarm
The ongoing political upheavals in the Middle East and North Africa (MENA) have adversely affected the bonds market in Gulf oil producers as investors sought to cut their exposure to the region, a key Saudi bank has said.
Bond prices have been somewhat volatile, and there has been a rally in recent weeks as investors have sought exposure to high-grade names, especially in Qatar and the UAE, and in recognition of the financial strength of Gulf sovereigns, the Saudi American Bank group (SAMBA) said in a study.
It said bond issue in the six-nation Gulf Cooperation Council (GCC) has stalled since unrest spread to Bahrain, a member of the 30-year-old group.
“GCC bonds have been adversely affected by the recent political upheavals, with prices under pressure as international investors indiscriminately reduced exposure to the region,” SAMBA said.
“Mirroring movements in CDS rates, Dubai 10 year sovereign bond prices have rebounded strongly and were up 4.5 per cent for the year in late March, while similar tenors for Bahrain and Qatar were down 6.7 and 1.4 per cent.
The report said available information suggests that Sukuk (Islamic bonds) have in general performed well with the Dow Jones Citigroup index up 1.2 percent year-to-date in late March.
“The ongoing re-pricing of political and sovereign risk could lead to more challenging market conditions for the GCC corporate sector, including government-related enterprises. This will be of particular concern in Dubai, which faces large refinancing needs this year, although markets currently look to be favourably inclined to the Emirate.”
According to the study, GCC bond and sukuk issuance has stalled since the unrest spread to Bahrain, which has had to postpone a planned $one billion sovereign issue.
But it noted that Abu Dhabi’s International Petroleum Investment Co (IPIC) has gone ahead and raised $4.4 billion in a well received issue of 5, 10 and 15 year bonds denominated in euros and UK sterling.
The Abu Dhabi-based Mubadala is also looking to follow shortly with a bond sale under its Global Medium Term Note Program established in 2009.
“Whether these issues will reopen the market to other GCC borrowers is uncertain. Pricing for the IPIC was reportedly inflated to increase the overall deal size, and may not offer an effective regional benchmark for others,” SAMBA said. “Such a benchmark might be provided by the prospective Mudabala deal. Even then, uncertainty and political risk concerns are likely to make it generally harder and costlier for the GCC to raise capital and project financing.”
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