The decline in the international loans is most probably a result of global banks, reducing their international exposure following the 2008 financial crisis. The governments and corporations in the GCC are increasingly looking to the bond markets as an alternative source of financing for the substantial projects and corporate expansions underway in the region, a QNB Group analysis noted yesterday.
There is $233bn in debt securities issued in the GCC in circulation equivalent to 17 percent of the region's GDP. This is a relatively low level compared with advanced economies where government bonds alone often amount to over 100 percent of GDP. According to analysis by QNB Group, this debt includes $17bn in central bank T-bills and $216bn in longer-term bonds and sukuks.
Bond markets are an attractive source of financing for a number of reasons. Long-term bonds are well matched to the long-term nature of the capital investments governments and companies are undertaking. Additionally, bond yields have reached record lows, making them a low-cost source of financing. For instance, in November 2012, a $1bn, 5-year note from QNB Group was issued with a coupon of 2.125 percent.
T-bill issuance in the GCC has also risen, particularly due to increased use of them by Kuwait and Qatar to manage domestic liquidity and support the development of capital markets. Saudi Arabia, Bahrain and Oman also issue T-bills and the UAE is planning to in the near future.
The largest GCC bond market is in the UAE, which accounts for 45 percent of outstanding bonds in the region and 27 percent of GDP.
Issuance of new bonds in the GCC reached $38bn for 2012 as at 20th November, slightly below the $45bn issued in 2011. This was due to lower government issuance. In 2011, Qatar had issued almost $19bn in sovereign bonds and sukuks in 2011, compared to only $4bn in 2012, to help build a yield curve to support local capital markets.
However, corporate debt issuance has risen strongly in 2012, accounting for 75 percent or $29bn of new bond issuance, more than double the corporate bond issuance of $14bn in 2011. The largest issue was a 10-year $4bn sukuk from Saudi Arabia's General Authority for Civil Aviation. Dolphin Energy, a UAE-Qatar gas pipeline company, issued a $1.3bn bond in February 2012 to refinance existing debt.
Abu Dhabi Islamic Bank issued a $1bn sukuk in November 2012 to shore up its core capital ahead of the implementation of Basel III standards. The sukuk was the GCC's first perpetual bond with no stated maturity.
QNB Group expects that regional companies will continue to drive bond issuance higher in 2013 for a number of reasons. Firstly, tapping debt markets has the benefit of broadening the investor base of GCC companies. Secondly, companies will be keen to take advantage of the prevailing low interest rate environment. Thirdly, strong growth is expected in the GCC, which will drive continued demand for project financing. Again, the global ambition of leading regional companies will continue to drive their international expansion, sustaining demand for financing. Many companies will need to refinance existing debt issues, particularly in the UAE. Finally, as the introduction of Basel III standards gets closer, more banks in the region could look at raising core capital through debt issuance.
GCC sovereigns have relatively high ratings, with a growing number of institutions obtaining a credit rating. This makes most GCC companies well positioned to enter the bond market and obtain relatively favourable financing terms.
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