Investors eye Gulf bonds

A revival of international bond issues from the Gulf is set to draw heavy demand from local and foreign investors, despite the latest geopolitical upheavals in the Middle East and the approach of higher US interest rates.

Gulf bond issuance has dried up since early July, because of a traditional summer lull in local investor activity as well as global market instability due to the crisis in Ukraine.

During that period, tensions in some parts of the Middle East have worsened dramatically. In June, Islamic State militants in Iraq stepped up a campaign that threatens to dismember the country; fighting in Libya has intensified, and Yemen’s government has moved closer to collapse. Israel has launched a war against Palestinian militants in Gaza.

On the face of it, that is a poor environment for a series of Gulf bond issues which is expected to start next month, and is likely to include a sovereign sukuk from the Emirate of Sharjah as well as a sovereign US dollar conventional bond from Bahrain.

But the vast majority of investors have decided that the geopolitics do not come close to posing any existential threat to the Gulf Co-operation Council economies.

That means next month’s bond issuers will be able to demand favourable terms as investors focus on the GCC’s economic strengths, including big current account and budget surpluses that set it apart from many other emerging markets.

“While geopolitical fears are always on foreign investors’ minds, they are unlikely to temper any demand for solid credit stories in the likes of Abu Dhabi, Dubai and Qatar for example,” said Anthony Simond, a London-based emerging market debt analyst at Aberdeen Asset Management.

Over the last few months, only a small amount of foreign money has been withdrawn from Gulf bonds in response to political events in the Middle East – and it has been easily offset by fresh inflows of money from local funds, said Zafar Nazim, credit analyst for the region at JPMorgan.

“Dedicated emerging market funds are staying put in the region and consider the region a safe haven,” he said, noting that some GCC economies were still attracting capital flight from less stable countries in the Middle East, Africa and South Asia.

Some issuers want to maintain or establish presences in the bond market now, so that they have another option when the loan market eventually starts to tighten.

“Many names are looking to tap the bond/sukuk market to take advantage of low coupons and also to replace bank borrowings, where they see upward re-pricing risks,” said Stuart Anderson, Middle East head at credit rating agency Standard & Poor’s.

Bahrain has hired four banks including Citigroup, Gulf International Bank and Standard Chartered to arrange its sovereign bond issue, and has plans to issue before the end of the year, bankers familiar with the plan said.

Meanwhile, Bahrain’s Gulf Finance House said this month that it planned to issue $200 million of sukuk ‘in coming months’ to repay outstanding debt and for acquisitions; the paper would be listed on NASDAQ Dubai.

The primary market is likely to have no problem coping with this surge of issuance, even if geopolitical tensions in the region worsen further. That’s because most investors – foreign as well as local – believe the GCC has managed to insulate itself from the turmoil.

More than geopolitics, the biggest threat to the Gulf’s primary bond market may be expectations for US interest rates. The currency pegs mean eventual US rate hikes are expected to feed through into official Gulf interest rates quickly.

But because of its current account and budget surpluses the Gulf looks likely to outperform most emerging bond markets if US rate hikes cause global instability.