GCC FDI, bonds poised for recovery: report

Foreign capital to rebound this year on resumption of shelved projects

Strong oil prices have given Gulf nations a shot in the arms in terms of investment and bonds activity as foreign capital have rebounded this year on the resumption of shelved projects, Saudi Arabia’s largest bank said on Sunday.

Large IPO offerings are also expected to underscore the recovery in the equity markets in the six-nation Gulf Cooperation Council (GCC), which has been encouraged by the surge in oil prices to sharply boost expenditure, National Commercial Bank (NCB) said in a study sent to Emirates 24/7.

“Even as the recovery in bank lending and capital raising through IPOs and bonds/sukuk is proceeding at a measured pace, the outlook for other sources of funding for investment has become increasingly encouraging,” it said.

“The regional governments have largely maintained their active stance in support of long-term infrastructure projects and it looks likely that government budgets will be significantly overspent this year, in part thanks to the higher than expected oil revenues…..also foreign direct investment in the region is showing signs of renewed strength after a 15 per cent drop in 2009.”

NCB noted the GCC’s economy, which relies heavily on crude and gas sales, has continued to benefit from its favorable performance and prospects at a time of global uncertainty following the 2008 financial crisis.

It said some GCC states are pursuing reforms, with for instance Kuwait reducing its marginal tax rate on foreign corporations from 55 to 15 per cent.

“Also the resumption of a number of infrastructure projects that were suspended or delayed during the crisis should serve as a magnet for foreign capital,” it said.

“Another reflection of the more benign market environment is provided by the pronounced revival of regional mergers and acquisitions activity after two slow

years. The GCC region’s share of global M&A deals dropped from eight per cent in 2007 to 3.2 per cent in 2010. In the first quarter of 2010, regional M&A deals totaled $3.6 billion, which alone was ahead of the annual total of $3.5 billion for 2009. Saudi Arabia, the UAE, and Qatar remain the most active markets.”

Turning to bonds, NCB said the third quarter of 2010 brought a much-awaited recovery to the GCC debt capital markets as the positive trends observed in the second quarter not only continued but in fact gathered significant momentum.

It said this revival became particularly pronounced in the post-Ramadan period when a number a high-value issues were announced.

“A confluence of both supply and demand-side factors appears to have contributed to this reinvigoration. The regional governments and corporates face significant debt refinancing needs in the near future – estimated at around $60 billion in 2011 – and periods of diminished market stress represent opportunities to proceed with the necessary issuance plans,” it said.

“At the same time, the improving risk perceptions of the GCC issuers, coupled with the global chase for emerging market paper, helped instill confidence.

The third quarter of this year saw robust growth in terms of both the number and the aggregate value of GCC conventional bond issuances.”

Its figures showed the number of offerings almost doubled from 14 in the second quarter to 26 in the third quarter. The total amount issued shot up by 141 per cent, from $4.5 billion in to 10.8 billion during in the same period.

“However, in the absence of high-profile offerings, the GCC sukuk market in the third quarter plunged below the disappointing opening quarter of the year. While the aggregate value of sukuk issues fell sharply to $362 million, the actual number of issuances nonetheless held up with a gain from six to seven.”

The study said that in a marked departure from the relative dominance of sovereign activity during much of the past year, corporate bonds led the way in the third quarter with some of the backlog of issues now activated in more benign market conditions. It showed companies accounted for 71 per cent of the total value of issues and 62 per cent of the number of offerings.

As for IPO, the report said such activity in the GCC has remained mixed, with only two issues in the third quarter. But it noted their aggregate value jumped by nearly 58 per cent to $648 million compared with the second quarter.

“Nonetheless, this total was still 11 per cent short of the corresponding figure in 2009 when two issuances raised a total of $729.9 million.”

The report showed GCC issuers during the first nine months of 2010 raised a total of some $1.4 billion through IPOs, a figure that still fell short of the $1.9 billion seen in the first nine months of 2009.

Saudi Arabia was the most active IPO market as it accounted for over half of the total – at around $900 million in the first nine months of this year.

Omani and Qatari issuers followed suit with issues of $500 million and $100 million, respectively. Saudi Arabia is the only GCC nation to have witnessed IPO activity in every quarter of 2010, according to NCB.

On a sectoral level, telecommunications have dominated the GCC equity markets. In January-November 2010, the telecommunication sector raised a total of $1,234.6 million, accounting for 44.2 per cent of the total issuance.

Real estate IPOs generated about $416.2 million and accounted for 14.9 per cent of total issuance in January-November, followed by the metals and mining sector with a share of around14 per cent.

“Importantly, however, government-sponsored IPOs – whether ones that are mandatory for regulatory reasons or involve policy backing or privatization – have remained a leading driver of issuance activity,” the study said.

“Looking ahead, large offerings are expected to underpin the ongoing recovery of the regional equity capital markets. So far this year, 71 IPOs have been announced, 43 of them in Saudi Arabia and 16 in the UAE.”

The study showed the largest pipeline issue is by Emirates Post, estimated at $272.3 million. Other pending IPOs include Naseej in Bahrain ($265.2 million) and Damac for Commerce and Services in the UAE ($254 million).

“Efforts are also underway for greater stock market integration on the GCC level with capital market officials unanimously agreeing on the need to unify all the regional stock market systems in order to boost performance.”


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