GCC Eurobond issuances to drop, with funding pressures easing for banks this year
GCC’s Eurobond issuance volumes will remain high in 2017 but below 2016's record levels. Oil price stabilisation, international sovereign debt issuance and lower credit growth to improve funding conditions for banks in the Gulf.
As governments seek to fund sizeable deficits at a time of strong investor demand, GCC sovereign Eurobond issuance volumes are expected to remain high this year, but well below 2016's record levels, estimates Moody's Investors Service in a recent research report. Movements in the oil price and global interest rates, together with factors such as the extent of fiscal reform and funding strategies, are expected to determine overall issuance needs, and the impact on sovereign credit profiles,
Steffen Dyck, a Moody's Senior Credit Officer explained in a press briefing that the sharp oil price drop in 2015-16, together with the limited depth of domestic markets and a favourable global interest rate environment, underpinned the record aggregate international debt issuance by GCC governments in 2016.
Last year GCC governments raised a combined $38.9 billion through international bonds to become the largest type of issuer on the regional fixed-income market. For 2017, Moody's projects approximately $32.5 billion of sovereign international bond issuance, representing about 21 per cent of the aggregate gross financing requirements for GCC sovereigns in 2017.
Although Saudi Arabia, Kuwait and Oman is expected to partly draw down on the government's sizeable sovereign assets, Moody's opines that favourable market conditions and the limited depth of many of the region's domestic financial systems will mean that all GCC issuers—except Abu Dhabi—will head to the international market again in 2017.
International debt issuances by GCC governments have helped to stem declines in foreign exchange reserves in many countries, as well as the need to liquidate financial buffers, in addition to supporting domestic liquidity. Establishing a sovereign benchmark yield curve can facilitate international capital market access for non-sovereign issuers. Moody's expects these effects to largely prevail in 2017.
The fact that most GCC sovereigns were able to access the international bond market in fiscally challenging times is seen by Moody’s as a credit-positive. However, the financing of continued fiscal deficits will lead to weaker net asset positions or rising net debt.
Looking at the banking sector, stabilising oil prices, large international sovereign debt issuances and lower credit growth are expected to improve funding conditions for GCC banks over the next 12 months. Moody’s in a recent research found that price stabilisation between $40-60 per barrel will improve oil revenues, supporting government and corporate deposits in the region's banking systems. Additionally, international debt issuance will also support deposits, while slower economic growth will subdue lending activity and reduce funding pressures for banks.
According to Mik Kabeya, Analyst at Moody's, banks in Oman and Qatar will benefit the most from easing funding conditions. This is followed by banks in Saudi Arabia and the UAE. Bahraini and Kuwaiti banks on the other hand, will continue to have the strongest funding and liquidity profiles in the region.
Due to the fact that they have been among the least resilient to a prolonged period of low oil prices. Omani and Qatari banks will benefit the most from the expected easing of liquidity. Moody’s explained that both banking systems face funding pressure as reflected by loan to deposit ratios of 103 per cent and 104 per cent, respectively, as of June 2016. However, the Qatari government (Aa2 negative) has higher financial reserves than the Omani government (Baa1 stable), providing it with a higher capacity to support local liquidity if necessary.
Funding conditions will stabilise for banks in the UAE, which have a net loans to deposits ratio of 94 per cent as of June 2016.
For Saudi Arabia, the funding squeeze experienced by Saudi banks since 2015 will ease, due to the government's payment of around $28 billion of overdue contractors bills late 2016 as well as Moody's expectation of low credit growth. In addition to this, Saudi banks are expected to maintain ample liquidity buffers.
Kuwaiti banks will remain primarily deposit-funded and well-cushioned by liquid assets that amounted to 36 per cent of tangible banking assets as of October 2016. The banks are among the most liquid in the region, with a combined net loans to deposits ratio of 82 per cent as of June 2016.
Similarly, Bahraini banks will also continue to exhibit one of the strongest funding and liquidity position in the region, with a net loans to deposits ratio of 76 per cent at June 2016 and modest loan growth that will require low levels of new funding.