Secure sales: Despite credit rating downgrades, the vibrant debt market continues to attract investment

One of the positive outcomes of the decline in oil prices over 2015 and 2016 has been a surge in activity in the GCC’s debt market. With oil revenues shrinking, governments around the Arabian Gulf have sought alternative sources of funding for their spending programmes, and the issuance of sovereign bonds has proved a useful solution for many of them. (www.creativesystems.com) Sovereign offerings accounted for more than half of all GCC bond sales in 2017, compared to just 12% in 2016, helping to produce a record-breaking year for the region’s debt arena. This momentum was carried through to 2018: according to Bloomberg in February 2018, bond issuances from the GCC states reached $16.8bn in the first two months of that year – the highest amount recorded since Bloomberg started to collect data in 2007.

Oman is playing a salient role in this development, making its largest-ever sovereign offering in January 2018. The $6.5bn bond was an important one for the sultanate. In December 2017 ratings agency Fitch cut Oman’s rating from “BBB” to “BBB-”, just one band above junk status, after Standard & Poor’s had already moved the country’s rating below investment grade. However, fears that investors would hesitate to engage with the Omani market were unfounded. The sovereign offering was well received, attracting orders worth $15bn, and its successful conclusion did much to boost the confidence of other sovereigns in the region mulling their own issuances. Issued in three tranches of five-year, 10-year and 30-year bonds, the sale covered most of the OR3bn ($7.8bn) budget deficit projected for 2018, a figure which is expected to decline as a result of rising oil prices. Despite its ratings downgrades, Oman has shown that it is capable of issuing sovereign debt at favourable terms to fund its budget shortfall.

Corporate Growth

The sovereign issuance in 2018 was also structurally important. The development of a sovereign yield curve for Omani debt will make it easier for corporates to price their own offerings, and in turn greatly assist the Capital Market Authority (CMA) and Muscat Securities Market (MSM) in their effort to build a vibrant debt market. The regulator has made this a central strategic goal, which it has begun to meet with measurable success. Sheikh Abdullah bin Al Salmi, executive president of the CMA, told local media in April 2018 that outstanding bonds and sukuk (Islamic bonds) on the MSM grew by 32% in 2017 to reach OR2.6bn ($6.8bn). The average growth rate of listed debt instruments on the MSM between 2012 and 2017 stood at 45%, with bonds and sukuk accounting for around 15% of total market capitalisation.

Significantly, the variety of debt instruments on the exchange is also increasing. Where once the MSM was home to government-issued paper and a small number of vanilla corporate bonds, it is now home to a range of debt securities, including conventional corporate bonds; government development bonds; perpetual bonds, which are issued by banks and non-banking institutions; Omani rial-denominated sovereign sukuk; US dollar-denominated sovereign sukuk; dual-currency sukuk; corporate sukuk; and sukuk programmes. These securities have greatly increased the number of liquidity-management options available to both conventional and sharia-compliant institutions, as well as provided a channel for foreign investment into the country.

Looking Ahead

The GCC bond market is likely to remain attractive to global investors. One reason for its popularity is that it is linked to hydrocarbons-rich sovereigns, yet its returns are independent of oil price fluctuations and have remained resilient even during times of economic stress. Another appealing feature is that almost all issuances are denominated in US dollars, and the remainder is issued in regional currencies which are pegged to it. Increasingly sophisticated investor relations and growing levels of transparency are also reducing risk and making investment management easier. Both corporate and sovereign issuers are likely to take advantage of these characteristics over the years, further deepening the region’s debt securities.