GCC sovereigns prepare funding plans
Thursday, Feb 01, 2018
Sovereigns across the Gulf have spent January preparing with varying degrees of urgency to meet the year’s external funding requirements.

This is budgeted to run to tens of billions of dollars, despite recent increases in oil revenues. Regional antagonists Saudi Arabia and Qatar approached banks about arranging benchmark international bond issues, and even financially conservative Kuwait was reported to be considering a second capital markets foray.

Meanwhile, plans emerged for Riyadh and Muscat to return to the syndicated loan market – the latter having made the Gulf Co-operation Council’s (GCC) 2018 bond debut with a multi-tranche offering earlier in the month.

Saudi Arabia’s Debt Management Office (DMO) confirmed in late January that requests for proposals (RFPs) had been sent to banks about roles on a forthcoming dollar-denominated bond issue. Interest was also sought for participating in the refinancing of a US$10 billion, five-year loan taken out two years ago – which would reprice the debt, add an Islamic facility and extend the maturity to 2023.

In the same year, Riyadh issued a maiden international bond – raising a record-breaking US$17.5 billion-worth of securities with maturities of five, 10 and 30 years. The government returned to global investors last year with a US$12.5 billion conventional bond and a US$9 billion sukuk.

The kingdom’s economic metrics have improved considerably since 2016 – when the oil price reached a nadir. A revised outlook published by the IMF on January 22 raised the GDP growth forecast for this year by 0.5% to 1.6%, projected to accelerate to 2.2% in 2019 and a recovery from zero growth last year.

The state budget, published in late December, foresees a narrowing of the fiscal deficit from 230 billion riyals (US$61.3 billion) in 2017 to a still hefty 195 billion riyals (US$52 billion), around 117 billion riyals (US$31.2 billion) of which is envisaged being financed by debt.

Banks have been queuing up to secure the Saudi authorities’ favour ahead of the government’s most radical funding innovation – in the form of the planned initial public offering (IPO) of shares in Saudi Aramco.
Doha stayed out of international bond markets in 2017 – in presumed wariness of negative investor reaction to the economic blockade imposed by Saudi, the UAE, Egypt and Bahrain in June.

Qatar last tapped the market with a US$9 billion three-tranche issue in 2016. However, the government was reported in late January to be close to selecting banks to arrange a proposed return to the market for an issue expected to be at least the size of that staged two years ago.

The budget deficit projected in December’s 2018 budget pales in comparison to Riyadh’s – at a mere 28.1 billion riyals (US$7.7 billion) – and an assumed oil price being rendered ever-more conservative by crude’s recent upward trajectory makes a marginal surplus more plausible.

However, Qatari banks have suffered an outflow of foreign deposits since the start of the embargo and are being encouraged by Doha to stage their own bond issues rather than relying on government liquidity injections – with a sovereign sale regarded as a means of setting a new benchmark.

Furthermore, several months into the blockade, international observers have confirmed domestic claims that the economy has been minimally harmed by the trade disruption, and the sovereign has retained an Aa3 rating from Moody’s – the GCC’s second highest after Abu Dhabi and Kuwait.

Riyadh is rated A1 by the same agency, which issued a downbeat report in mid-January warning of a negative credit outlook for the GCC as a whole as a result of subdued growth, political tension and mounting debt burdens.

Kuwait last year became the last of the GCC sovereigns to turn to international capital markets for funds, raising US$8 billion in five and 10-year paper in March.

The government has been signalling its intent to return to global investors through legislative changes. In January, a parliamentary committee approved a draft law raising the debt ceiling to 25 billion dinars (US$83.2 billion) and with the maximum tenor extended from 10 to 30 years in November.

Discussions are reported to have begun with potential arrangers. However, like Qatar, the state is expected to register a surplus in both the 2017/18 year ending in March and in 2018/19, and the necessary acquiescence of the country’s obstructive parliament – which has yet to agree the legal changes – is far from assured.

Oman staged the region’s first sovereign bond issue of the year in early January – raising US$6.5 billion in five-, 10- and 30-year paper and thereby covering the bulk of 2018’s projected 3 billion riyal deficit (US$7.8 billion) barely weeks into the plan.

However, Muscat was reported in late January to be having discussions with banks about raising a US$2 billion syndicated loan – covering the remainder of the shortfall. The sense of urgency is assumed to derive partly from fear of further ratings downgrades: Moody’s lowered the sultanate’s score to a lowly Baa2 in July, with a negative outlook.

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