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Low oil prices are push issuers towards debt, say analysts.

Gulf sovereigns eye record funding in bond markets

DUBAI, December 17, 2015

Bond bankers are scrambling to secure business from beleaguered Gulf sovereigns, which are expected to engage in record breaking fundraising next year to cover widening fiscal deficits.

Countries in the GCC are tipped to need more than $250 billion over the next two years, through a variety of means, as they seek to combat the effects of sliding oil prices.

"We now estimate that the aggregate fiscal deficit of the GCC in 2015-2016 will be close to $265 billion, higher than previously estimated," Mathias Angonin, an analyst in Moody's sovereign risk group, told IFR. "This does not include debt that needs to be refinanced, so the financing needs will likely be higher than that."

While much of that money will be raised through asset sales and new taxes, including a proposed introduction of VAT in the UAE, bond markets will also become an important source of funds.

Bankers say sovereigns could raise at least $15 billion in the international market next year. That would be more than all GCC sovereign dollar debt issuance from 2013 to the end of 2015.

"Next year we expect more sovereign supply from the region," said Iman Abdel Khalek, a director in Citigroup's Middle East DCM business. "Some borrowers are more price sensitive than others and look at funding opportunistically."

Saudi Arabia is likely to steal the show with the sovereign heavily rumoured to make its long-awaited debut in the international market.

The Kingdom's finances are coming under greater pressure with the IMF estimating its budget deficit this year will be 20% of GDP. Although it still has $640 billion in net foreign assets, it can't keep funding its projected deficit forever if oil prices remain depressed.

"Saudi Arabia has about four years left of financing if it only relies on FX reserves and oil stays where it is," said an analyst.

Bankers reckon Saudi will seek to raise at least $5 billion in the international market next year, complementing its funding in the local market, which it tapped for the time since 2007 in July.

The sovereign has since raised SR95 billion ($16 billion) from domestic investors and is borrowing on average SR20 billion of new money a month.

Saudi's expected foray into the dollar market in 2016 has already got the leading international banks - keen to scoop the coveted mandate - sounding it out, according to sources.

"For Saudi, will $5 billion make or break anything? Of course not," said a debt capital markets official from a bank rumoured to have already approached the sovereign. "But it is an opportunity to diversify their source of funding."

Not everyone is convinced that Saudi Arabia will pack the punch that bankers are hoping for.

"Saudi has leaked that it is going to do a big deal," said a UAE bond banker. "It wouldn't surprise me if they come with [a smaller deal of] US$1 billion and get an enormous response."

GCC RUNS DRY

While there is little doubt that Saudi Arabia's rarity in the market and Aa3/A+/AA ratings mean it will sail through even a US$5 billion deal, others may find it tougher. Bankers have touted Oman, Qatar, Dubai, Bahrain and even Kuwait as potential issuers next year.

The fact that GCC sovereigns require the most financing in years comes at a difficult time for the region's investors.

Gulf banks have seen liquidity dry up as they too harbour the ill effects of low oil prices. The most notable example is National Bank of Abu Dhabi, which saw government deposits plunge by US$13 billion in the 12 months to October as sovereigns looked to shore up their finances.

The sharp decline in liquidity has had a calamitous effect on new bond placements with Abu Dhabi Commercial Bank the biggest casualty - the issuer had to pull a deal after announcing price thoughts in September.

"Everyone has been talking about it non-stop since it happened," said an analyst.

Other deals have struggled, with books more often than not just about fully subscribed.

"Liquidity is tightening across the GCC with reduction in the growth rate of deposits, even while credit growth is still high in some countries," said Nitish Bhojnagarwala, a bank analyst in Moody's Dubai office.

Bhojnagarwala cited Qatar as one place where credit growth is particularly high, reaching into the double digits. – Reuters




Tags: bond market | Low oil prices |

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