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29 March 2024

Project financing needs to spur growth in GCC bond markets

Project financing needs to spur growth in GCC bond markets. (EB FILE)

Published
By Nadim Kawach

NCB Capital, the affiliate of Saudi Arabia's National Commercial Bank, has expressed optimism for bond markets in the Gulf Co-operation Council (GCC) states.

In a recent study made available to Emirates Business, it said: "The GCC bond markets, which were badly hit in the first quarter of 2010 because of investor scares and high spreads, appear to be on the path to recovery while many of the structural drivers militating for their continued growth are strong. Spreads on the domestic-currency denominated bonds are normalising. Better pricing, as a result of lower spreads, should encourage potential issuers to tap the market," the study said.

"This is particularly true for issues that have been deferred in the recent past in search for better pricing. The monetary policy environment looks likely to remain favourable for some time with US rates set to be low for an extended period," it said.

NCB Capital noted that the GCC countries have high levels of planned capital expenditure for various infrastructure projects, adding that bonds and sukuk were among the most attractive ways of funding them. It referred to Saudi Arabia's plans to boost its production and refining capacity through new investments of $170 billion over the next five years. The kingdom is expected to invest around $53bn in water projects in the next 15 years to meet its growing demand.

More bonds and sukuks expected

The state-owned Qatar Petrochemicals Company intends to invest $12bn to raise its production from 18 million tonnes to 30 million tonnes by 2014. "The increasing need for long-term financing is likely to see a number of corporate and sovereign sukuk and bonds coming to the market next year," the report added.

NCB Capital said the geographic distribution of sukuk issuance has undergone significant changes in the GCC region, with the UAE reporting no sukuk issuance during the first quarter of 2010 and the share of Saudi Arabia in global sukuk issuance increasing from around 2.4 per cent in the fourth quarter of 2009 to 9.6 per cent in the first quarter of 2010. Despite signs of domestic economic recovery, it expects uncertainty to persist in the GCC debt capital markets for the time being. But it voiced optimism over medium- and long-term prospects.

According to the study, the sharp fall in the GCC sukuk issuance in the first quarter of 2010 was mainly due to a slowdown in the sovereign sukuk market, with Bahrain being the only active government issuer in the region. "This echoes similar trends in the conventional bond market. Sukuk issuance in the GCC in the fourth quarter of 2009 had been above all driven by two issues made by the Dubai Department of Finance, with an aggregate value of $1,930.6 million (Dh7.09m).

"Similarly, in the second and third quarters of 2009, the Central Bank of Bahrain (CBB) issued long-term sukuk of $750m and $437.5m, respectively. In contrast, only the CBB issued its usual series of short-term, money market sukuk in the first quarter, with a value of $174.9m," the study said.

"This lack of government sukuk issues reflected a general aversion to sovereign credit during the quarter. The Greek credit crisis and the poor outlook for other heavily indebted European nations – most notably Portugal, Ireland, Italy and Spain – has dented investor appetite for government bonds," it added.

RECENT ISSUES AND MEASURES IN GCC

- Bahrain-based Gulf International Bank sold a SR3.5 billion (Dh3.42bn) five-year bond in Saudi Arabia in April this year.

- Dubai Electricity and Water Authority launched the first Dubai Government-related issue this year with a $1bn five-year bond, the first in a planned $3bn programme.

- Emaar Properties is planning to raise $2bn through an ijarah sukuk issue. The funds will be used to finance the company's expansion plans.

- Saudi Electricity this month received CMA approval for a sukuk. The relatively short tenors of sukuk remain something of a challenge given the long durations of many of the planned investment ventures. Most sukuk issues have maturities of three to five years, which reduces their competitiveness as compared to bank funding.

- The UAE Ministry of Finance is looking to establish a federal credit bureau to promote transparency and help monitor the credit-worthiness of individuals and corporate entities across the country.

- A new industry body known as The Gulf Bond and Sukuk Association was instituted in Dubai in January this year to create a regulated and effective regional credit market.

- In March, Bahrain launched a new corporate governance code.