Looming ‘vision’ project deadlines spur GCC bond market growth

July 23, 2024, 4:06 AM

'Investors might be more comfortable holding Mena sovereign bonds' that are outperforming US Treasuries

Bond market funds ‘vision’ projects
$75.5bn issued in H1
55% from government sector

Gulf countries are racing to complete ambitious “vision” agendas, pushing the total value of GCC bond and sukuk issuances since 2014 to more than $1 trillion.

Each GCC country is working towards its own goals – whether that be the Saudi Vision 2030, We the UAE 2031, or Kuwait Vision 2035 – with the aim of transforming economies away from a reliance on hydrocarbons.

But these strategies all cost money. Saudi Arabia alone is investing more than a trillion dollars into its roster of giga-projects, managed by the Public Investment Fund, which have been hit by the global economic downturn.

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“We expect GCC issuance to sustain current momentum given the dynamics of Saudi Arabia’s funding requirements,” says Faisal Ali, senior portfolio manager of Dubai-based investment company Azimut.

Primary debt issuances of bonds and sukuk in the six GCC member states – Saudi Arabia, the UAE, Bahrain, Kuwait, Oman and Qatar – totalled $75.5 billion in the first six months of 2024, up 38 percent year on year, according to the latest figures from the Kuwait Financial Centre (Markaz).

“Governments are aggressively using the issuing of bonds to finance plans for economic diversification and infrastructure expansion,” says Mohamed Hashad, chief market strategist at Noor Capital.

The government sector accounted for the largest amount of primary debt issuances by value, raising a total of $41.5 billion, or 55 percent of the total value of issuances in the GCC in H1 2024.

As of the first quarter of this year, the Saudi government had a budgetary requirement for the price of oil to reach $92 per barrel to cover its expenditures – taking in the PIF investments, this more realistically rises to $109 per barrel.

"With oil currently around $84, it is likely that the government will turn to international borrowing to meet its funding needs, giving an additional boost to the bond market,” says Vijay Valecha, chief investment officer at Century Financial.

On average, investment-grade US dollar-denominated Mena sovereign bonds offer a yield of 5 percent for an eight-year maturity, says Althea Spinozzi, head of fixed income strategy at Saxo Bank.

In contrast, US Treasuries with the same maturity yield approximately 100 basis points less than Mena investment-grade sovereigns.

Additionally, the performance of Mena sovereign bonds has been strong, providing a total return of nearly 4 percent in the year to date, while US Treasuries have remained almost flat, rising only 0.4 percent over the period.

“Investors might be more comfortable holding Mena sovereign bonds, not only due to their low GDP debt ratios but also because inflation is under control in these countries,” says Spinozzi.

Sukuk issuances amounting to $26.6 billion made up more than one-third of the total value of primary issuances during H1 2024, recording a 14 percent increase from the same period last year, reports Markaz.

Sukuk are sharia-compliant bonds developed as an alternative to conventional bonds, which are not considered permissible by many Muslims as they pay interest and may finance businesses involved in activities not allowed under Islamic law.

“Most of the sukuk issuances in the GCC are now investment grade, and the overall debt capital market in the region is expected to exceed $1 trillion,” says Valecha.