GCC debt issuance was moderate in 4Q19 relative to previous quarters, standing at around $11bn, including $3.9bn in sukuk, compared to circa $30bn in 3Q19. Issuances have moderated possibly due to refinancing needs being already completed during the year. Issuances in 4Q19 were dominated by sovereigns and quasi-sovereigns.
NBK in its ‘economic update’ noted that though 4Q19 posted a modest issuance, in comparison to prior quarters, the gross issuance throughout 2019 was solid reaching $102bn, and total outstanding debt (domestic and international) rose to $517bn at the end of 2019 from close to $457bn.
Issuance may have eased in 4Q on the back of a lower need to refinance after the exceptionally strong run earlier in the year, driven in part by a large volume of maturities: around $43bn in GCC bonds and Sukuk matured in 2019. With generally expansionary budgets and low borrowing costs, issuance has regained traction so far this year. More than $11bn had been issued as of mid February, one of the most notable of which was a $3bn issuance by QNB in Qatar, NBK analysts noted.
GCC medium-term sovereign yields diverged from global trends in 4Q19, with yields in four out of six GCC countries broadly steady in 4Q19. Continued international interest in GCC debt likely dampened a potential increase in yields, driven by attractive risk-adjusted returns and inclusion of most GCC sovereigns in the global benchmark JP Morgan Emerging Market Bond Index (EMBI).
Oman and Bahrain witnessed a second consecutive quarter of sharp declines in sovereign bond yields, which decreased by 79 and 82 bps, respectively. The two countries continued to benefit from improved outlooks.
The two bonds are typically more volatile than their peers and yield/price movements are usually more pronounced.
Given that GCC yields declined considerably in 2019 and that alternative global yields increased in 4Q19 resulting in narrower spreads with GCC ones, NBK analysts believe that the scope for further considerable declines in GCC yields may be limited going forward. Furthermore, following the multiple GCC interest rate cuts seen in 2019 and the current neutral stance of the Fed, the likelihood of additional GCC rate cuts in 2020 is relatively low.
The fact that the outlook for oil prices remain soft may increase the implied risk of GCC fixed income instruments and push yields higher. Any major adverse developments in terms of geopolitical risks will most likely drive up yields.
