New debt issuance was weak in 3Q14, as seasonal factors and geopolitical turmoil dampened activity, most notably in the non-financial sector, a specialized economic report showed Wednesday.
The report, issued by the National Bank of Kuwait (NBK), said that a notable development was the issuance of debt by sovereigns that had not recently issued debt, including Bahrain and Sharjah.
A relatively low rate environment and new banking capital regulations have encouraged issuance as well. Meanwhile, sovereign rates have stabilized in recent months, owing to the region's strong regional outlook. As a result, spreads to US treasuries have remained tight.
"Growth in the GCC's outstanding bonds was held back in 3Q14 by weak non-financial sector issuance. GCC debt markets added a mere USD 832 million over the quarter, to reach USD 266 billion at the end of 3Q14 with growth slowing to 9 percent y/y," reads the report.
The UAE, KSA, and Bahrain were behind the bulk of the issues, driven by their public sectors which took prominence given the weakness of private issuance.
"Public sector issuance was mostly unchanged from the previous quarter at USD 6.5 billion, but was characterized by issuances by less active sovereigns," it added.
Bahrain, which last issued debt over a year ago, capitalized on positive investor sentiment by issuing USD 1.25 billion worth of debt, while the Emirate of Sharjah raised USD 750 million in its first sukuk.
"The wider participation of regional sovereigns could reflect the increased maturity of regional debt markets. In this regard, the UAE is considering legislation that could help streamline sovereign offerings by individual emirates," the report stated.
Meanwhile, the Qatari public sector was uncommonly inactive this quarter despite healthy demand for its paper by Qatari banks and foreign investors.
The report showed that the non-financial sector, which has recently been a primary driver of regional debt growth, witnessed its slowest quarter in five years. Issuance reached a low USD 250 million, following strong activity the prior quarter. "Regional turmoil triggered by the unrest in Syria and Iraq and a slowing global economy may have curtailed non-financials' interest in tapping regional debt markets. Issuance by this sector is expected to remain healthy going forward, as private sector growth picks up. The sector will also need to refinance nearly USD 4 billion in maturing debt over the next year." Moreover, the report disclosed that the financial sector issuance slowed somewhat from the previous quarter. With USD 2 billion in new issues, the figure was almost half its two year average, and the weakest in a year.
"The third quarter saw the issuance of a pair of perpetual bonds by regional banks, reflecting the ongoing adoption of Basel III standards. Future issuance by this sector is expected to maintain a steady pace, encouraged by low rates and the prudential regulatory environment, "The average maturity of outstanding debt in the GCC increased to 6.2 years due to the longer maturity of recent issues," said the report.
The data also showed that banks in particular sought to boost their capital base through perpetual issues. Non-financial debt maintained its average tenor of 9 years, while the average time to maturity of public debt was extended by six months to 5.5 years.
"Sovereign yields seem to have stabilized towards the end of the third quarter, following a declining trend. Stronger investment sentiment, encouraged by a positive regional outlook, was partly responsible for this," the report suggested.
As a result, sovereign spreads have tightened in recent months, benefitting as well from the steady increase in US treasury rates.
Global economic turbulence has seen these spreads widen recently, yet they remained relatively small as the GCC economies stood firm against the headwinds. Sovereign yields for Dubai, Abu-Dhabi and Qatar remained steady at 3.14 percent, 1.99 percent and 2.43 percent, respectively, for 5-6 year paper.