Global investor appetite in GCC debt stays strong

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Global investor appetite in GCC debt stays strong

Dubai - Investor appetite is likely to remain strong in 2019


Issac John

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Published: Mon 28 Jan 2019, 9:03 PM

Last updated: Mon 28 Jan 2019, 11:08 PM

The trend for a sustained upswing in government debt in Mena countries on the back of widening fiscal deficits will provide a fresh set of opportunities for global investors in 2019, according to a white paper released on Monday.
Investor appetite is likely to remain strong in 2019, as GCC bonds are included in the JP Morgan EMBI index series and regional governments sustain ambitious reform agendas, said the paper co-authored by Emirates NBD Asset Management, Kamco Investment Company and Fisch Asset Management.
Starting January 31, 2019, sovereign bonds and Sukuks from Saudi Arabia, the UAE, Bahrain, Kuwait and Qatar will gradually gain inclusion on the JP Morgan EMBI Index, which already includes Oman. The process of inclusion will be carried out over a nine-month period. 
Collectively, the five new GCC members are expected to represent nearly 11.2 per cent of the index and bring in an estimated $30 billion to $60 billion worth of inflows into the GCC sovereign credit market.
"The JP Morgan EMBI inclusion is likely to attract between $30 billion and $60 billion in inflows to GCC bonds," according to experts. 
In 2018, local and hard currency issuance from Mena reached $145 billion, and fund managers see regional bonds as attractive compared to emerging market peers.
The paper, "Mena debt: an evolving world for fixed income investors," said Mena hard currency bond and Sukuk issuance reached $84 billion in 2018, with demand for new issues remaining high as regional debt was oversubscribed two and half times.
Faisal Hasan, head of Investment Research at Kamco Investment Company, said regional gross government debt as a percentage of GDP increased from 29.7 per cent in 2014 to 44.4 per cent in 2018, after a series of issuances.
Parth Kikani, director Fixed Income at Emirates NBD Asset Management, said GCC fixed income provided a safe haven during a sustained EM sell-off period.
"For 2019, we think risks are more balanced, and investors will need to be more discerning in credit selection. While risks stem from further oil price volatility, increased issuance and geopolitical uncertainty, investors may benefit from attractive risk premiums, improving fundamentals and the benefits of index inclusion leading to efficient price discovery. Moreover, with most GCC currencies pegged to the US dollar, this reiterates an attractive relative risk premium amid weakening emerging market FX rates and a stronger US dollar," said Kikani.
The paper noted that within less than a month in 2019, the GCC has already delivered $9.1 billion in issuance from both sovereigns and corporates, including the Saudi sovereign, First Abu Dhabi Bank (Sukuk) and Dubai Islamic Bank (AT1), setting the scene for the rest of the year. 
In addition, there are market-wide expectations that Saudi Aramco will issue debt in second quarter to fund its SABIC stake acquisition.
The paper pointed out that despite volatility in oil prices, default risk in the GCC remains low. The GCC region has seen very few defaults or restructurings compared to broader emerging markets. -

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