Banks in the UAE will account for more than 70 per cent of the refinancing of bonds maturing in the GCC next year and in 2011 and are expected to capture the bulk of issuances in the region, says a new report.
Banks with higher loan-to-deposit ratios in other countries such as Bahrain and Qatar could also tap the market, says the Standard Chartered Bank's Middle East Credit Compendium 2009-10. This may help to address investors' concerns about the banks' funding situation.
Debts worth $33 billion (Dh121bn), in both bonds and sovereign and corporate loans, will mature in the GCC between now and the end of 2010, says the study.
At the same time the refinancing needs of the GCC's banks is estimated at $17.8bn, taking the total requirement of corporates, sovereigns and banks during this period to more than $50bn.
"In aggregate, the refinancing needs in the banking sector are broadly evenly split between bonds and syndicated loans," the report adds.
Among the UAE banks, Emirates NBD and Abu Dhabi Commercial Bank have the highest redemptions over the next six quarters, totalling $1.9bn and $1.5bn respectively.
The sovereign and corporate new-issue market came to a standstill in the second half of last year but witnessed a flurry of debt issuances, with the total reaching $26bn this year, including the Abu Dhabi sovereign, Qatar sovereign and quasi-sovereigns such as Mubadala and Aldar Properties. In the banking space, the third quarter of this year saw a revival with volume touching $4.2bn.
The GCC has seen increasing levels of external debt but it is manageable, says SCB.
Despite the cyclical downturn, the GCC countries enjoy a strong net foreign assets position. There is also a drive to diversify the region's economies away from oil in order to achieve more sustainable development and create jobs. Demographics, diversification and the dollar will continue to dominate the economy in the coming years and will be key engines of growth.
Economies in the region can look forward to positive surprises in 2010 as oil prices appear to have ended their downward trend. Economists at SCB say credit was tight in 2009 but the position will improve next year.
The UAE banks' funding gap – the difference between loans and deposits – was Dh116bn at the beginning of this year but narrowed to Dh42.9bn by July. If the trend continues the UAE could see more favourable credit conditions next year. In the rest of the GCC, banks have not been as leveraged and credit is likely to improve with an improvement in economic performance in 2010.
According to the report, rising borrowings by quasi-sovereign entities in both the bond and loan markets has resulted in increasing debt levels in the GCC. Over the past five years GCC sovereigns, corporates and banks have raised more than $100bn in the bond market. The primary driver of this has been the large funding needs of both corporates and banks, given the rapid pace of economic development and growth in the region.
"Although the UAE is one of the most diversified economies, oil and gas still represent a large proportion, about one-third, of its GDP," the report says. "Oil and gas production has been the mainstay of the UAE economy and will remain a major revenue earner well into the future due to the vast hydrocarbon reserves at the country's disposal.
"Proven recoverable oil reserves are estimated at 98.2bn barrels, or eight per cent of global crude oil proven reserves. As for natural gas, proven recoverable reserves are currently estimated at 5.8bn cubic metres, or four per cent of the world total."
The study says the UAE economy, which had an average growth rate of around nine per cent over the past six years, has slowed considerably this year. "It was hit hard by the global credit crisis, which resulted in lower real estate prices, banking-sector credit constraints, and lower oil and gas prices. Although the economy appears to have bottomed out, we are likely to see appreciably lower levels of growth for the next few years," the report says.
SCB notes that, though lower fiscal and current account surpluses are expected this year due to lower oil prices and reduced production, the surpluses from the past few years were extremely strong, averaging around 20 per cent of GDP.
"It is also worth highlighting that the fiscal accounts understate the actual fiscal position since they exclude the profits of Abu Dhabi National Oil Company and the investment income of Abu Dhabi Investment Authority (Adia), both of which are directly paid into the Adia.
"In terms of the external balance, while the current account is likely to recover from the current levels, the capital account is unlikely to return to the levels of 2007, which were inflated due to the relatively high external borrowings that year."
The report says international reserves were quite healthy. The UAE is a substantial net creditor, with total foreign assets on the order of $450bn, including the foreign assets of the ADIA, the Central Bank, ADIC and the International Petroleum Investment Company. Total foreign debt at the end of 2008 stood at around $135bn.
The report says authorities in the UAE came out with timely policy responses to the economic crisis. The Central Bank introduced measures to improve liquidity, reduced its key policy rate and guaranteed bank deposits, while authorities supported the banks by shoring up both deposits and capital.
However, contingent liabilities via the debt obligations of the banks and corporates – most of which are quasi-sovereign – are very high, but should be easily manageable.
"Dubai-based entities account for about two-thirds of the external debt of the UAE. While this represents a major contingent liability both for Dubai and the federation, support from the UAE Government is strong and, given its sizeable net creditor position, should be easily manageable."
Looking at the real estate sector in Dubai, SCB says it remains under pressure.
"Given the relatively tight credit conditions and oversupply, the outlook is likely to remain weak for some time and will probably continue to put pressure on both the loan quality and profitability of banks."
The report says Saudi Arabia has built up a strong foreign-asset cushion and is in a strong position to withstand near-term shocks.
The largest oil producer in the world, accounting for 14 per cent of global production, has touched a production capacity of 12.5m barrels a day. The country has low external debt levels, $35.6bn at the end of 2008, and total government debt dropped to around eight per cent of GDP at the end of 2008.
Even though the kingdom does not have a formal SWF it has been accumulating foreign assets for a number of years. It has managed to accumulate close to $400bn in foreign assets, including Saudi Arabian Monetory Agency's forex reserves. The country has low levels of debt and is a strong net creditor. "While the sovereign does face some potential contingent liabilities via the banking sector, we consider them to be easily manageable considering the resources available."
The bank is also positive about Qatar, which has built up significant external and fiscal cushions and has a very strong capacity to service its debt obligations.
"Qatar's sovereign debt issuance programme has been extremely well-coordinated, and given the ample liquidity in the local banking system, the eurobonds issued by various Qatar-based entities – sovereign or otherwise – enjoy strong local support."
Kuwait, despite its sizeable war chest of foreign assets, large oil reserves and relatively low level of international debt, saw recent defaults by corporates that hurt sentiment.
But SCB takes a negative view of Nahrain because its oil reserves are depleting fast and it needs to resort to borrowing to fund its budgetary requirements.
Refinancing on time
The UAE will be able to meet all its refinancing obligations on time, a senior bank official said.
"In Dubai we have seen, right from the beginning of this year, that all deals have been settled without any hassles," said Abbas Hasan, Managing Director and Head of Investment Banking at Mashreq.
Dubai has $46 billion (Dh169bn) maturing between now and 2013, mostly in the form of loans. The burden will be heaviest in 2011, when $23bn matures. The largest maturities over the period are Nakheel's $3.52bn 2009 bond; Ports, Customs and Free Zone World's $6.8bn 2011 loan; and Investment Corporation of Dubai's $4bn 2011 loan.
The Standard Chartered report says: "Concerns about Dubai's ability to service its debt obligations, which peaked in February when the sovereign five-year credit default swap (CDS) was trading close to 1,000bps, have eased considerably since the federal assistance provided to the emirate via the $10bn bond taken up by the UAE Central Bank."
While spreads have contracted significantly, they remain well wide of their pre-Lehman levels on account of the event risk around the Nakheel 2009 bond and other debt maturities over the next few years.
Hasan said: "It is obvious institutions want the CDS to fall further before they take on their fund-raising programmes. If the CDS falls by 50 basis points it could reflect on the pricing of their bonds to the extent of about 0.5 per cent." (CL Jose)
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