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02 March 2020

GCC: A rocky beginning

The GCC has earned its reputation for pricing blockbuster primary transactions, setting the stage for 2020 borrowing programmes. However, sluggish economic growth, geopolitical pressures and a global epidemic continue to weigh on capital markets and hydrocarbons

The current GCC spread is around 155 bps, which provides significant carry considering its high credit quality compared to other emerging market regions

In its Global Investment Outlook 2020 report, Emirates NBD suggested that the relative optimism for the year ahead is predicated on the growth-boosting effects of looser monetary policy, and a moderate easing of tensions related to the US trade tensions and Brexit.

“After a spectacular 2019, propelled by monetary easing meeting excessive pessimism, we expect markets to come back to the reality of fundamentals,” said Maurice Gravier, Chief Investment Officer at Emirates NBD Group.

With US and China being the world’s two largest economies and major trading partners, a decline in their trade flows will hurt not only their countries but also the global economy. While Gulf nations have been steadily diversifying their economies, primary income is still generated from oil revenues.

Therefore, any volatility in oil could dampen confidence among investors and affect the regional markets. Market reports have suggested that the Middle East could be indirectly affected if the trade war escalates.

The region accounts for 40 per cent of China’s oil imports and if industrial activity dips as a result of slow growth, demand for oil exports from the MENA could also fall.

Fixed income

The GCC bond market has provided investors with class topping returns several times within the fixed income asset class in the last decade, said Emirates NBD.

The Arabian Gulf witnessed a larger than expected borrowing spree with sovereigns issuing more to plug their budget deficits through debt markets, on the back of lower oil prices. Issuers in the Gulf have made a significant impact in international capital markets to reduce their reliance on the oil and gas sector.

It has earned its reputation for pricing blockbuster primary transactions, setting the stage for 2020 borrowing programmes and upcoming refinancing due, said Gravier. Emirates NBD explained that on a ratings adjusted basis, the region remains attractive, especially compared to their lowerrated emerging market peers such as Southeast Asia.

Saudi Arabia sold its first Eurobond of the year in January as tensions in the Middle East dialled down following the US assassination of a top Iranian general. The Kingdom issued $5 billion in debt, taking advantage of low borrowing costs globally, reported Bloomberg.

Saudi Arabia issued a $1.25 billion seven-year tranche at 85 bps over US Treasuries with a yield of 2.54 per cent, a 12-year offering of $1 billion at a spread of 110 bps and a yield of 2.88 per cent, as well as a $2.75 billion 35-year tranche.

The Kingdom is seeking to plug part of its growing budget deficit by selling about $32 billion in local currency and international debt over the course of the year. According to Emirates NBD, the current GCC spread is around 155 bps, which provides significant carry considering its high credit quality compared to other emerging market regions.

GCC countries such as Saudi Arabia and the UAE are on the path of massive economic transformations, attracting foreign capital flows and the yield-hungry investors’ search continues to provide strong technical support to the regional bonds as they offer higher risk-adjusted returns globally.

2019 was a good year for all asset classes and emerging market debt was no exception. Gravier pointed out that given the easing backdrop, returns could even have been higher. However, they were capped by the US-China trade tensions which kept investors sceptical for most of the year.

Emirates NBD expects emerging market central banks to have enough headroom for policy easing, aiming at stimulating economic growth, which is a robust technical catalyst for their fixed income markets.

A dominating factor remains the growth differential between emerging markets and developed markets, whereby emerging markets contributes to over two-thirds of global growth, along with strong demographics and consumption story.

“The effects of last year’s rate cuts will be felt, supporting consumer spending, helping manage the enormous amounts of debt in the system, and providing oxygen to other central banks especially in emerging economies,” said Gravier.

Furthermore, the US Federal Reserve has indicated a willingness to continue to expand its balance sheet by buying short-term bills, which had been in play since the Q4 2019 repo situation. The developments in the mature markets are said to have consequences in the emerging world.

Black gold

Oil markets are at risk of a soft year in 2020 as anxiety over trade relations between the US and China continues, coupled with broader slowdown across the industry in developed and emerging markets.

Emirates NBD expects oil production growth to remain high as non-OPEC countries’ supply surges. Despite the slowdown in the pace of growth, due to the shale boom, US has become the largest oil producer in the world this year, overtaking Saudi Arabia and Russia, eroding more of OPEC’s market share.

OPEC+ started a fresh round of deeper production curbs in January 2020, the latest step in a three-year effort to prevent the US shale supplies from putting the global market into surplus. However, the outlook has deteriorated rapidly in the last few weeks as the coronavirus curbs air traffic and slows China’s economy.

The share of deeper cuts will be borne most heavily by Saudi Arabia, the UAE and Kuwait, amongst OPEC producers, while Russia, Kazakhstan and Mexico are due to take most of the burden for non-OPEC producers.

Saudi Arabia also made its over-compliance official, pledging an additional 400,000 barrels per day (b/d) of output restraint, in addition to the official cuts endorsed by OPEC+. The decision by OPEC+ to deepen production cuts will help set a floor for prices but will not be enough to move the market into deficit in H1 2020, said Emirates NBD.

OPEC+ officials have met in February to assess how China’s coronavirus may hurt oil demand and what measures they can take in response. The International Energy Agency expects growth in oil demand to improve in 2020 to around 1.2 million b/d from closer to the 1 million b/d last year.

Unlike 2019 when virtually all the demand growth was contributed by emerging markets, a recovery in OECD, Europe and Asian demand will drive developed markets to record a growth of about 300,000 b/d, suggested the report.

Nevertheless, ENBD highlighted that the fixation for oil markets remains on what happens in China and India, as well as other large, and growing, consumer markets in emerging economies.

RELATED STORIES: GCC Emirates NBD Black gold OPEC+ Saudi Arabia



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