MIDDLE Eastern governments have already set a record for debt sales, as the sustained fall in oil prices weakens public finances across the world’s largest crude-exporting region.
Countries including Abu Dhabi and Bahrain have borrowed $8.6bn on international capital markets so far this year, beating the previous high set in 2009, when the Gulf’s construction projects and property boom came unstuck after Dubai shocked investors by asking for a debt standstill.
Debt markets in the region may receive a further lift in the next month as governments and state-backed companies attempt to wrap up sale plans before Ramadan begins on June 7.
“The low oil prices have led to an acute fiscal crisis in the region, hence the sudden need for debt,” said Philippe Dauba-Pantanacce, economist at Standard Chartered. “As these are small countries that want to maximise their borrowing opportunities they are looking at international markets to find the largest pool of potential lenders.”
Gulf governments including Qatar, which last year raised a loan of more than $5bn, are already in talks with banks to tap international bond markets for the first time in years, emboldened by the success of Abu Dhabi’s sale of debt in April, in which the emirate attracted $17bn of bids for a $5bn bond.
Lower crude price leads region’s governments to borrow $8.6bn this year
Bankers say Saudi Arabia is expected to issue its debut international bond after the summer, following the arrangement of a $10bn loan with a group of banks including HSBC, Bank of Tokyo-Mitsubishi and JPMorgan.
The issuance aims to ease pressure on local bank liquidity, which has tightened since the oil price slide, as well as providing a benchmark for the companies to tap markets.
Other possible future debt issuers include the UAE’s federal government, which is looking into raising its own debt in addition to bonds sold by individual emirates, and Iran, which is in talks with credit rating agency Fitch.
“This is the year of debt,” said one Dubai-based banker. “Amid the gloom, the DCM people are keeping busy.”
The slide in oil prices has put government finances under intense pressure. However, the premium demanded by investors to buy debt issued by Middle Eastern sovereigns instead of US government debt has fallen since February as prices for Brent crude perk up from $32 a barrel to $43 and a weakening dollar eases pressure on currency pegs.
At the end of April, Abu Dhabi was able to borrow over 10 years at 3.12pc, about 125 basis points over US Treasuries. The same sale of debt in 2009 came with a 6.75pc rate and a higher spread over the US benchmark.
But the rise in debt has led to comparisons with the region’s previous credit expansion and subsequent crunch.
HSBC economist Simon Williams says sovereign, financial and corporate borrowers in the Gulf Cooperation Council must repay or refinance $94bn in bonds in 2016 and 2017. This, he said, would be increasingly difficult amid slowing growth and rating downgrades.
Published in Dawn, Business & Finance weekly, May 16th, 2016
