A report issued by the National Bank of Kuwait’s Studies and Research Unit confirmed a decline in yields on Gulf sovereign bonds in parallel with a decline in risks and a rise in oil prices. Gulf Cooperation Council debt issuance picked up in the third quarter of 2017 as the typically slower summer season came to an end but activity remained predominantly in the public sector, the report said.
Total new issuance amounted to $24 billion compared to $21 billion in 2Q17. Private sector activity continued to weaken in 3Q17, with the share of sovereign issuances up to 94 percent. Total outstanding debt was up a healthy $20 billion, to rest at $415 billion, according to the report. Sovereign activity was strong during 3Q17 with $23 billion in new issuances and the bulk coming from Saudi Arabia.
Bahrain tapped international markets for the second time this year with a $3 billion issuance. Despite Bahrain having a rating below investment-grade by the three main rating agencies, the offering was well received and almost five times oversubscribed, reflecting the strong appetite and increased attractiveness of the regional debt market. Saudi Arabia and Kuwait issued domestic debt of $11 billion and $4 billion, respectively.
Following the sharp increase in the Credit Default Swap (CDS) rates on the back of Qatar’s dispute with its GCC neighbors, CDS rates for most of the tracked sovereign’s came off in 3Q17. For the most part, the region’s risk profile benefited from the recovery in oil prices. CDS rates for Saudi Arabia and Qatar dropped the most, by 31 bps and 22 bps, respectively. As for the rest of the GCC, their rates were little changed.
GCC debt issuance is expected to remain healthy in 4Q17 as sovereigns continue to seek cheap deficit financing in favorable market conditions. In early October, Saudi Arabia raised $12 billion in dollar-denominated debt almost a year after its debut international issuance. Abu Dhabi also just completed a $10 billion international offering.
GCC yields tracked international markets and closed the quarter slightly lower. The quarter saw a marked improvement in oil prices, which also helped GCC yields move lower. Oil prices were up 25 percent in 3Q17, increasing the appeal of regional paper as fiscal concerns were alleviated. Most GCC sovereign yields were marginally down on the quarter.
Yields on GCC sovereign bonds dropped more notably following the sell-off seen in 2Q17. On the international level, global and GCC debt markets yields traded in a narrow range in 3Q17 as central banks’ increased hawkishness and the improving economic outlook were countered by geo-political tensions, White House political challenges and stubbornly low inflation.
Issuance in the GCC picked up in 3Q17, but continued to be dominated by domestic sovereign issuance. Bahrain was the only country to issue internationally. GCC primary debt market activity is expected to stay healthy for the remainder of 2017.
International benchmark yields trended downward for most of the quarter as North Korea worries benefited safe haven assets. Persistently low inflation in the major economies also continued to put a cap on yields. However, most yields ended the quarter slightly higher following a more hawkish tone by the unveiling of President Trump’s pro-business tax plan late in the quarter.