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S&P Reports Chart Increasing Bond and Sukuk Issuance in GCC
Capital market issuance for corporates and infrastructure projects during 2017 was more than double that seen in 2016, S&P says. Higher issuance has been due in part to the prospect of higher interest rates in 2018, and to some GCC banks running up against single-exposure limits from global investors, and so having to diversify their funding sources.
The report is entitled, ‘Despite Mounting Uncertainties, GCC Capital Market Issuance is Climbing Rapidly.’
Budget-constrained governments in the Middle East are increasingly looking to their government-related entities (GREs) to raise funds – rather than relying on sovereign bond issuance. With government budget deficits remaining big, S&P expects this trend to continue in 2018.
About 85% of S&P’s rating actions on corporates and infrastructure projects have been negative over the last year, though most of these have been linked to Bahrain and Oman, and to Qatar. About two thirds of S&P’s corporate and infrastructure ratings are on GREs, and their ratings are often driven largely by the rating of the sovereign.
Bond and sukuk yields were up a about 50bps during 2017. Sukuk yields have risen more than those on corporate bonds; and sukuk issuance fell significantly in the second quarter of 2017 following the refusal of Dana Gas to honour its sukuk obligations.
S&P says that the most unpredictable and significant risk in the region is political risk, and most notably the tensions between Saudi Arabia and Iran, the corruption charges against leading Saudi figures, and the trade embargo against Qatar.
Energy subsidies and tax reform across the GCC are also seen as key risks. A reduction in energy subsidies could weaken the operating performance of utilities and downstream oil and gas companies, S&P says. Aggressive tariff reform could increase electricity and water prices which could have negative consequences for economic demand. The introduction of Value Added Tax in the GCC could also dampen demand.
S&P thinks that difficult economic conditions will continue to depress the real estate sector in 2018. Qatar’s real estate sector has shown the greatest decline so far, S&P says.
In a second report, entitled, Prospects for GCC Corporate and Infrastructure Sukuk Issuance Are Uncertain Despite a Strong Start to 2017, S&P notes that sukuk issuance in this segment was $6.8bn in the first nine months of 2017, compared to $2.8bn in the first nine months of 2017. Sukuk issuance was more than half of all corporate and infrastructure debt of $12bn issued over the first nine months of 2017.
However, S&P notes that the number of corporate suuk issues remains low and continues to be dominated by a few bespoke deals. Corporate and infrastructure sukuk accounted for 8% of total GCC bond and sukuk issuance in the first nine months.
S&P comments that ‘green’ project sukuk may lead to greater issuance – the first such issue was achieved by Tadau Energy, a Malaysian subsidiary of China’owned Edra Power in July. (It was a Ringgit 250mn ($61mn) issue.) S&P expects that a number of utilities that it currently rates could consider ‘green’ issuance.
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