The GCC bond market is set to benefit from the region’s improving macroeconomic climate, which is supported by various pro-growth factors including the green shoots in the global economy, say experts from France’s Crédit Agricole Private Banking.
Monetary policies have been used effectively to handle sub-prime crisis-led recession. Chief economist of Crédit Agricole Private Banking, Dr Marie Owens Thomsen, says: “The legacy of the Big Recession is higher debt levels, higher unemployment rates, and lower potential growth.
“Fiscal and monetary policies have been used to the maximum in order to mitigate the impact of the Big Recession and to achieve higher growth rates.
“While the outcome would almost certainly have been much worse without these efforts, it is clear that more needs to be done if higher rates of growth are to be attained. Nevertheless, the GCC region with its strong macro fundamentals can be said to be one of the rising stars in our globalised economy.”
Now, the attention has to be paid to structural reforms. Dr Thomsen says: “The one avenue that has been left under-used is structural reform, and every country from mature to emerging economies need structural reform. Results from structural reform can be rapid and spectacular – China is the most shining example but the rise of Saudi Arabia, Qatar and the UAE as regional business centers in recent years are noteworthy. The UAE climbed three ranks to 23rd place in the World Bank’s 2014 ‘Ease of Doing Business’ ranking.
“In this context, we would say that more structural reforms could catapult the GCC economies to their next level of development which will ultimately lead to more economic stability and prosperity in our new global economy.”
The GCC bond market has more potential to the upside as it is driven by a supportive macroeconomic outlook, ample liquidity and a strong local investor base. This is especially the case with Dubai Inc and government related entities.
Head of MENA Fixed Income and director at the Dubai office of Crédit Agricole Private Banking, Christiane Nasr, says: “It can be seen that the GCC bond market is somewhat of a bipolar investment case. There is the promising aspect of the region’s strong macro fundamentals which are supported by generous government spending, healthy oil prices and improving credit profiles of local companies that are pushing for tighter credit spreads than current levels.
“However, on the other hand the GCC mandates a higher risk premium due to the element of a ‘what if’ scenario comprising of geopolitical risk and fears of conflict escalation.”
The GCC bond market has posted an impressive performance last year in comparison to its peers in other emerging markets. From a performance perspective, regional bonds in the high yield category led by Dubai Inc have returned more than seven per cent in 2013 outperforming other emerging markets which were in negative territory for the first time since 2008.
Last year’s positive momentum on GCC corporates continues in 2014 so far. Year-to-date, GCC corporates have returned more than two per cent, which is twice better than other counterparts in emerging markets. While political, economic and social turmoil has fuelled volatility in some high growth markets such as Ukraine, Turkey and Venezuela, the GCC region remains resilient confirming its status as a defensive play.
“There are various factors which could be attributed to GCC bonds outperforming global Emerging Markets. The credit profiles of regional corporates are improving with stronger fundamentals as reflected in their sound liquidity and their lowest level of leverage since 2009 On the other hand, banks are experiencing a revival in credit and loan growth without compromising their asset quality as reflected in the decreasing ratios for non-performing loans. Moreover, sovereigns benefit from robust liquidity with ample foreign exchange reserves and low levels of debt. This positive momentum is leading to rating upgrades across the region. Earlier this year, Emaar Properties gained an ‘investment grade’ status for the first time since 2009. In context of this overall scenario, we can expect other corporates and sovereigns to be upgraded as well”, says Nasr.
“The technical picture driven by the imbalance between supply and demand is also supportive for GCC bonds. There is ample liquidity waiting to be parked in new issues while supply has been lacking. We can expect more issuance going forward in a scenario where investors’ appetite is significant. More than $18 billion worth of regional bonds are maturing this year and we can expect these companies to come back to the primary market to refinance their debt.
Moreover, favorable macroeconomic trends are fuelling the development of new projects regionally and many companies are looking to expand, particularly in the UAE in context of Expo 2020. Thus, regional corporates are expected to perform well in 2014, with spreads moving tighter as long as the geopolitical risk is contained,” says Nasr.