GCC bonds to gain from macro-economic climate
Dubai, March 12, 2014
The GCC bond market is set to benefit from the region’s improving macroeconomic climate, which is supported by various pro-growth factors, according to experts.
Dr Marie Owens Thomsen, chief economist, Crédit Agricole Private Banking, said: “The legacy of the Big Recession is higher debt levels, higher unemployment rates, and lower potential growth. Fiscal and monetary policies have been used to the maximum in order to mitigate the impact of the Big Recession and to achieve higher growth rates. While the outcome would almost certainly have been much worse without these efforts, it is clear that more needs to be done if higher rates of growth are to be attained.
“Nevertheless, the GCC region with its strong macro fundamentals can be said to be one of the rising stars in our globalised economy.”
“The one avenue that has been left under-used is structural reform, and every country from mature to emerging economies need structural reform. Results from structural reform can be rapid and spectacular – China is the most shining example but the rise of Saudi Arabia, Qatar and the UAE as regional business centres in recent years are noteworthy,” said Dr Thomsen.
“The UAE climbed three ranks to 23rd place in the World Bank's 2014 ‘Ease of Doing Business’ ranking. In this context, we would say that more structural reforms could catapult the GCC economies to their next level of development which will ultimately lead to more economic stability and prosperity in our new global economy,” she said.
The GCC bond market has more potential to the upside as it is driven by a supportive macroeconomic outlook, ample liquidity and a strong local investor base. This is especially the case with Dubai and government related entities.
Christiane Nasr, head of Mena fixed income and director at the Dubai office“It can be seen that the GCC bond market is somewhat of a bipolar investment case. There is the promising aspect of the region’s strong macro fundamentals which are supported by generous government spending, healthy oil prices and improving credit profiles of local companies that are pushing for tighter credit spreads than current levels.”
“However, on the other hand the GCC mandates a higher risk premium due to the element of a ‘what if’ scenario comprising of geopolitical risk and fears of conflict escalation”, said Nasr.
She noted that the GCC bond market posted an impressive performance last year in comparison to other emerging markets. The regional bonds in the high yield category led by Dubai have returned more than sevent per cent outperforming emerging markets, which were in negative territory for the first time since 2008.
The GCC corporates returned more than two per cent, which is twice better than other counterparts. While political, economic and social turmoil has fuelled volatility in some high growth markets such as Ukraine, Turkey and Venezuela, the GCC region remains resilient confirming its status as a defensive play, said Nasr.
“The technical picture driven by the imbalance between supply and demand is also supportive for GCC bonds. There is ample liquidity waiting to be parked in new issues while supply has been lacking,” said Nasr.
“More than $18 billion worth of regional bonds are maturing this year and we can expect these companies to come back to the primary market to refinance their debt. Moreover, favorable macroeconomic trends are fuelling the development of new projects regionally and many companies are looking to expand, particularly in the UAE in context of Expo 2020,” she said.
“Thus, regional corporates are expected to perform well in 2014, with spreads moving tighter as long as the geopolitical risk is contained.” - TradeArabia News Service