Bond issuers in the Gulf will have to make potentially costly decisions on timing in coming weeks as the cash-strapped region gears up for one of its heaviest-ever periods of international issuance – possibly over US$25 billion by the end of October.
Saudi Arabia, its finances strained by low oil prices, is expected to make its market debut in September. Bankers in touch with Saudi officials say it may come close to Argentina’s $16.5bn issue in April, the largest emerging market debt sale.
Bahrain has also chosen banks for an issue, while Kuwait has said it may sell up to $10bn of conventional bonds and sukuk in global markets during the fiscal year to next March. Officials have indicated this could happen as soon as September.
Add to that half a dozen major companies in the six-nation GCC looking at issuing bonds, including Abu Dhabi’s Union National Bank and Abu Dhabi National Energy Company, and there is the risk of a temporary supply glut that could push yields higher or even force some issuers to delay their plans.
Sergey Dergachev, senior money manager at Union Investment Privatfonds, a Frankfurt emerging markets debt investor, said the most important factor could be the Saudi issue’s size.
“If they issue a huge amount it will lead to some repricing in spreads among GCC credits and will make life for other GCC sovereigns and corporates in issuing debt a little bit trickier, as the market needs to absorb a large issue size.”
The potential scale of the Saudi sale saddles other issuers with tough choices. If they wait until after Riyadh issues, market demand for GCC debt may be temporarily reduced – but if they move ahead of Riyadh, they may find potential buyers holding back cash in anticipation of the Saudi bond.
The risks of waiting may be increased by the Eid Al Adha holidays around September 9 to 17, when business traditionally slackens and an issue may be trickier, and by the US Federal Reserve policy meeting on September 20 to 21, which could produce a US interest rate hike.
Since oil prices began sliding in mid-2014, GCC governments have mostly relied on running down financial reserves and issuing debt domestically to cover budget deficits.
That has begun to change in the past few months as reduced flows of petrodollars into GCC economies have tightened liquidity at banks and lifted interest rates. This is pushing both governments and firms to borrow abroad.
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