Kuwait City — Emerging market countries have issued a record amount of bonds since the start of 2024 to capitalize on the growing appetite for new bonds and to lock in lower rates, as yields have seen a steep decline since Q4 2023.
Moreover, the majority of the anticipated rate cuts by the US Federal Reserve and other central banks are already reflected in current yields, which could result in yields remaining low in the near term.
Additionally, economists are forecasting increased risks this year, especially relating to geopolitical issues in the Middle East, economic challenges in China, and significant elections.
According to a recent report by Kamco Invest, the uncertainty over rate cuts has also contributed to keeping yields attractive for both issuers and buyers, resulting in record orders for bonds issued by some sovereigns. For instance, the yield on 10-year US Treasury bonds fell to 3.8 percent during the last week of December 2023 and closed last week at 4 percent.
On the other hand, the total bonds issued since the start of the year amounted to around US$37 billion. Saudi Arabia accounted for the majority of the total issuances, with US$12 billion and US$30 billion in orders, as the Kingdom seeks to address fiscal deficits forecasted at around US$25 billion in 2024.
At A Glance * Emerging market countries issued a record amount of bonds in early 2024, capitalizing on declining yields since late 2023. * Anticipated rate cuts by the US Federal Reserve and other central banks are reflected in current low yields. * Economists predict increased risks in 2024, including geopolitical issues in the Middle East and economic challenges in China. * Kamco Invest reports that uncertainty over rate cuts keeps bond yields attractive for issuers and buyers. * Saudi Arabia led bond issuances in early 2024, addressing a forecasted fiscal deficit of about $25 billion. * Bloomberg estimates that sovereigns may issue approximately $2.1 trillion in bonds in 2024, a 7% increase from the previous year. * The UAE was the largest bond issuer in the MENA region in 2023, followed by Saudi Arabia and Morocco. * Banks were the largest issuers in the MENA region in 2023, with aggregate bond issuances of $25.2 billion. * GCC countries were the primary drivers of bond issuances in the MENA region in 2023. * Kuwait's central bank is expected to cut rates at a slower pace due to smaller rate hikes in the past two years. * Interest rate futures indicate a two-thirds chance of the first rate cut by the US Federal Reserve in March 2024. * Global fixed income issuances in 2024 are expected to be strong, with emerging market bonds setting records at the start of the year. * Sukuk issuances are expected to increase in 2024, driven by lower rates and diversified funding strategies. * Maturity of sukuk in 2024 is likely to be the highest on record for GCC issuers, totaling $37.9 billion.
The high demand is also enabling issuers to narrow the spread on these new bonds. Estimates from Bloomberg indicate that sovereigns may issue around US$2.1 trillion in new bonds during 2024 to finance their spending plans, marking a 7 percent increase from last year.
In the MENA region, aggregate bond issuances reached US$95.9 billion in 2023, compared to US$80.6 billion in 2022. This growth was led by higher issuances from corporates in the region, more than offsetting a decline in issuances by MENA sovereigns.
At the country level, growth in 2023 was led by increased issuances from GCC corporates and sovereigns, which helped offset an overall decline in issuances from non-GCC MENA countries. The UAE was the largest bond issuer in the MENA region during 2023, followed by Saudi Arabia and Morocco.
After experiencing a more than 50 percent year-over-year decline in issuances in 2022, MENA bond issuances saw a recovery in 2023, reaching US$95.9 billion. This represented a year-over-year growth of 19 percent, or US$15.3 billion. However, total issuances remained below the average of the last five years. The increase in 2023 was primarily driven by higher corporate issuances, which more than compensated for a decline in sovereign bond issuances.
On the corporate side, aggregate bond issuances in the MENA region reached US$40 billion in 2023, compared to US$23.1 billion in 2022. Government issuances, however, saw a marginal decline from US$56.5 billion in 2022 to US$55.5 billion in 2023. Across various sectors in the MENA region, there was broad growth during the year, with only the utilities and property & casualty insurance sectors experiencing declines, while the rest witnessed growth.
Banks remained the largest issuers in the region, with aggregate bond issuances of US$25.2 billion in 2023, up from US$15.7 billion in 2022. Financial Services and Pipeline companies followed, with issuances reaching US$8.1 billion and US$3 billion, respectively.
Within the MENA region, GCC countries were the primary drivers of higher bond issuances during the year. Total bond issuances by GCC countries stood at US$58.2 billion in 2023, up from US$40.4 billion in 2022, marking an increase of 44.2 percent.
In contrast, bond issuances by non-GCC MENA countries (including Egypt, Morocco, Jordan, Tunisia, and Lebanon) declined in 2023, reaching US$37.7 billion compared to US$40.2 billion in 2022. The most significant decline was in Egypt, where issuances fell to US$9.6 billion in 2023 from US$24 billion in 2022, a decrease of US$14.4 billion.
On the other hand, the UAE experienced the largest growth in issuances during the year, reaching US$31.5 billion in 2023 compared to US$19.8 billion in 2022. The UAE was also the top bond issuer in the region, followed by Saudi Arabia and Morocco with aggregate issuances of US$19.1 billion and US$18.3 billion, respectively. Both countries registered strong year-over-year growth in issuances.
In terms of the type of issuers in the GCC, both government and corporate sectors registered higher year-over-year bond issuances in 2023. Total sovereign bond issuances in the GCC stood at US$18.2 billion in 2023, compared to US$17.2 billion in 2022.
Meanwhile, GCC corporates showed healthy growth during the year, with total bond issuances reaching US$40 billion, up from US$23.1 billion in 2022. The monthly trend in GCC issuances revealed significant issuances during the first two months of the year, aggregating US$22.5 billion, followed by smaller but consistent issuances for the remainder of the year.
Expectations for 2024
The outlook for 2024 indicates that central banks in key countries are considering cutting interest rates for the first time in two years. There is, however, divergence among central banks regarding the magnitude of the expected cuts.
Recent consensus forecasts from Bloomberg suggest that the US Federal Reserve is likely to reduce rates by around 150 basis points in 2024 to 3.9 percent (mid-point), while the Eurozone is anticipated to undertake a steeper rate cut of around 200 basis points.
Fed dot plot projections indicate 75 basis points in rate cuts for 2024. The rate cuts by other central banks are expected to be relatively lower, depending on existing rates, pressure on foreign exchange rates, economic trends in the market, and, importantly, inflation.
Kamco anticipates that rate cuts by GCC central banks will be broadly in line with the US Federal Reserve, owing to the pegged currencies against the USD. Kuwait is expected to be an exception in the GCC, as its currency is pegged to a basket of currencies.
The report anticipates that Kuwait’s central bank will implement rate cuts at a relatively slower pace compared to the US Federal Reserve. This is primarily because the Kuwaiti central bank enacted the smallest rate hike over the past two years and is, therefore, expected to cut rates at a more modest pace.
In the last week of December 2023, consensus forecasts for 2024 indicated that treasury yields are likely to trade around current levels for the next six months, followed by a decline in the second half of 2024. According to a Reuters poll, this suggests that the market has fully priced in the rate cuts for 2024. Reuters reports that interest rate futures are now pricing in about a two-thirds chance of the first rate cut in March 2024, down from a 90 percent likelihood two weeks earlier.
Expectations for global fixed income issuances in 2024 remain positive, with both sovereigns and corporates being encouraged to enter the market. The year began on a high note with record issuances of emerging market bonds.
Forecasts from Bloomberg suggest government bond issuances will reach close to US$2.1 trillion globally, an increase of 7 percent from 2023. The significant maturities expected in 2024 are largely due to issuances during the pandemic. There is also the risk of sustained inflation, although recent data suggests otherwise. Consequently, several corporates and governments are seen rushing to issue bonds to lock in lower prevailing rates.
Issuances of sukuk are expected to increase in 2024 after experiencing two consecutive years of declines. Key drivers for growth in sukuk issuance include lower prevailing rates, crude oil prices remaining around the US$70 per barrel levels, and diversification efforts, as various countries and corporates incorporate Islamic sukuk into their funding mix. Sovereigns in the GCC, in particular, are likely to focus on raising debt through the sukuk route due to subdued expectations for oil prices.
Moreover, the maturity of sukuk in 2024 is likely to be the highest on record for GCC issuers, totaling US$37.9 billion. The refinancing of these securities is expected to keep GCC issuances high throughout the year.
In terms of GCC bond issuances, maturities are also significant in 2024, amounting to US$45.3 billion. The refinancing of these instruments is anticipated to account for the majority of issuances by corporates and governments in the region this year. This trend will likely be further supported by a strong pipeline of projects across the GCC, which are related to the respective goals of economic diversification in these countries.