Despite an improvement in crude prices and expectations of domestic economic recovery, the debt market in Gulf oil-producing states declined sharply in the first quarter of 2010 because of widening uncertainty and better prospects about growth in bank lending, according to a key Saudi investment firm.
Conventional bond activity in the six-nation Gulf Cooperation Council (GCC) tumbled by nearly 70 per cent in the first quarter of this year compared with its average in the previous three quarters, said NCB Capital, an affiliate of National Commercial Bank, the largest bank in Saudi Arabia by assets.
The sukuk (Islamic bonds) market in the region suffered more, with the value of their issuance plummeting by around 81 per cent, in sharp contrast with South-east Asia, where the value shot up by nearly 114 per cent.
While prospects for such activities in the GCC remain bleak in the near term, they are expected to brighten in the medium- and long-term as regional economies gain steam on the back of firm oil prices.
Projections by the International Monetary Fund (IMF) show that real gross domestic product (GDP) growth in the GCC is expected to rebound from around two per cent in 2009 to nearly 5.8 per cent in 2010 and 2011. All member states are forecast to record positive growth while Qatar's economy will roar up by nearly 18.5 per cent in 2010 and 14.3 per cent in 2011.
Debt markets closer to recovery
"The opening quarter of 2010 brought the GCC debt markets little closer to recovery. Market uncertainty, sovereign risk fears and restructuring worries caused yields to shoot up," NCB Capital said in a 10-page study on the GCC debt market for the first quarter of 2010. "At the same time, issuance volumes fell sharply, especially in the case of sukuk. However, the proposed Dubai World deal helped brighten prospects towards the end of the quarter. While the near-term outlook remains uncertain, structural drivers for the GCC debt capital markets are very strong with a growing need for long-term financing," said the study, sent to Emirates Business.
The study noted that the near-term outlook for the GCC debt market remains uncertain, adding that the market is not immune to the deteriorating situation in the European bond markets following the Greek fiscal crisis.
"However, we see an encouraging outlook in the medium- to long-term. The GCC debt market holds significant potential given the long-term financing needs of the region and the size of the current pipeline. But structural risks such as ambiguous insolvency provisions and a lack of clarity among sukuk structures, will require greater attention than they have received to date." According to the report, the growing optimism that characterised GCC debt markets during much of 2009 seems to have largely evaporated during the first quarter of 2010 due to uncertainty and an expected improvement in bank credit.
Six issuances in first quarter
It said sentiment was shaken by high-profile events such as the disputes associated with the $100 million (Dh367m) TID Global Sukuk issued by Kuwait's Investment Dar and the Dubai debt issue. Both cases heightened market uncertainty and raised broader concerns about sukuk structures and the lack of widely accepted mechanisms for dealing with default-type situations, it said.
"Further anxiety was caused by rising sovereign risk worries in Europe, which spilled over into conventional bond markets. The widening spreads caused potential issuers to shy away from the market. The reversal in market sentiment was especially sharp in the case of sukuk."
NCB Capital's figures showed there was an unusual wave of sovereign debt issuance in the GCC countries through most of 2009. Government bond issues in the six members totalled $20 billion during the first three quarters of the year, and mostly came from Abu Dhabi and Qatar. Dubai continued the trend in the fourth quarter.
In contrast, the GCC conventional bond market recorded a lacklustre performance in the first quarter of 2010 as the private sector is yet to replace the government as the key market driver, the report added.
Figures showed that the value of conventional bond issues was down by some 70 per cent from the average of the previous three quarters, to about 3.4 billion. The first quarter of 2010 registered only six new conventional bond issuances, down 65 per cent from the average of the previous three quarters.
"The significant decline in conventional bond issuance was largely linked to continued debt market uncertainty. In addition, bank lending in some GCC countries is showing tentative signs of improving after credit growth was sharply hit during the global economic slump," the report said. "The expectations of further progress in this area may have prompted some corporates to adopt a wait-and-see attitude."
The report noted that the improvement in banking lending activity has been gradual. While credit growth in Saudi Arabia increased by only around one per cent to nearly $198.3bn since March 2009, bank lending in the UAE swelled by about 2.2 per cent to nearly $277 billion in the same period. "Although overall bank lending still remains low, banks are likely to benefit from an improved economic environment, growing domestic demand and consolidation in their financial position on the back of reasonable provisioning.
Also the equity market has shown some signs of gaining traction, with GCC companies once again considering initial public offerings (IPOs)that were stalled during the global financial crisis," NCB Capital said. The report showed that during the first quarter of this year, a total of $420.3m was raised through IPOs in the GCC countries, compared to just $80m during the first quarter of 2009. It expected this "cyclical recovery" to weaken one of the drivers behind the recent take-off of the GCC bond markets.
Saudi issues quarter's biggest sukuk
Turning to sukuk, the report showed that after a slight dip in the fourth quarter of 2009, the aggregate value of GCC sukuk issuances plunged by 81 per cent in the first quarter of 2010 to nearly $625m. In contrast, the number of sukuk held up better, it said, adding that there were seven issues in the first quarter of 2010 as against 10 in the fourth quarter of 2009. "On an annualised basis, the total was still significantly ahead of the $88m issued in the corresponding quarter of last year."
A breakdown showed the largest sukuk issuance in the first quarter of 2010 came from Saudi Arabia where the Dar al Arkan Real Estate Development Company placed a $450m five-year sukuk. Moreover, the Central Bank of Bahrain concluded a series of six sukuk issues to raise $174m.
"The lacklustre quarter in the GCC stands in sharp contrast to developments elsewhere in the world. Total global sukuk issuance rose by 114 per cent year-on-year (y-o-y) to $4.7bn in the first quarter of 2010, although it declined by 43 per cent quarter-on-quarter (q-o-q)."
It showed there were 53 new issues in the first quarter of 2010, up on 39 in the same period of 2009. "The positive trend was primarily led by market revivals in Malaysia and Indonesia, which jointly accounted for nearly 86.5 per cent of the sukuk issued in Q1 of this year," NCB Capital said. While the value of sukuk issuance in Malaysia leaped by about 114.4 per cent y-o-y during the first quarter, Indonesia reported y-o-y growth of 173.8 per cent. "The strength of those markets is increasingly linked to the rising participation of private sector corporates."