GCC states plan to raise $50b to reduce deficit

Muscat: Gulf states are planning to raise funds worth of $50 billion by way of bond issues to reduce deficits which are expected to grow with oil prices remaining relatively low, according to a study conducted by Fisch Asset Management.
The equity and bond markets of the UAE emirates of Abu Dhabi and Dubai; Kuwait and Saudi Arabia between mid-August and late September also showed a decline.
With falling crude oil prices, GCC deficits are expected to grow, with sovereigns and corporates likely to lever up. This will lead to further rating downgrades. While the pipeline for new issuances for the end of the year is valued at around $50 billion, most global debt investors will continue to take a cautious approach to GCC issuers.
“It’s true that the GCC debt market still looks good compared to negative yields in developed markets, but regional credits have had a substantial rally with the huge overhang of new issuances that we’ve been waiting to see before the year-end,” said Philipp Good, head of Portfolio Management at Fisch Asset Management.
“We think there will probably be some re-pricing. Global debt markets are uncertain at the moment, in part due to the United States election, the Italian referendum and the problems experienced by Deutsche Bank,” he added.
“While bond yields in the GCC still look attractive compared with other markets, investors need to believe in issuers – for example, the reforms scheduled for the Saudi economy. Bonds ultimately need buyers, and that means the market needs to be in the right shape – not just the pricing. In our view, momentum has peaked, so our strategy for the GCC is defensive,” he explained.
“We view Abu Dhabi Commercial Bank (ADCB) as one of the strongest banks in the region with a very strong brand recognition. Our assessment maintained a stand-alone rating of BBB for ADCB in view of the bank’s high equity ratio and reserve coverage,” Philipp said.
“Our A- rating for senior unsecured debt also remained unchanged, based on the bank’s ownership structure and historical support. Our assessment for most of the major UAE banks is broadly similar,” he added.