“Al Jazeera” – Economy:
As a result of the decline in both government and corporate issuance, issuance of fixed income instruments in GCC countries has seen a sharp decline since the beginning of 2022 to date. The fall in government issuances mainly reflected the rise in oil prices, which reduced funding requirements. On the corporate front, the fall was driven by higher interest rates as well as higher stock valuations, which made fund raising from equity markets more attractive than the bond market. This is according to a report by Kumco Investment Company.
On the economic front, the governments of the Gulf Cooperation Council countries are expected to register the highest annual GDP growth rate this year, owing to the recovery in economic activity after the pandemic, apart from increased government spending on development projects. , According to consensus estimates, the GDP growth rate of GCC economies is expected to reach 7.3 per cent in 2022 as compared to 2.5 per cent in 2021. In 2023 and 2024, the growth rate is expected to be relatively lower at 3.4 percent and 2 percent. .9 percent, respectively. The momentum in economic activity was also reflected in Purchasing Managers’ Index (PMI) readings for the region, which have been well above 50 points since the start of the year for Saudi Arabia, Qatar, the UAE and Dubai.
Globally, expectations during the year were influenced by timing and how China will return to work and open its economy after adopting a zero COVID policy. After the recent lifting of restrictions, the debate now revolves around whether the country will go into lockdown again, in light of several reports indicating rising cases of infection and increasing burden on medical facilities. Growth in the rest of the world’s economies was affected by higher commodity prices, including oil prices, due to the effects of tight supplies as a result of the conflict between Russia and Ukraine. Record high energy prices exacerbated the problem of inflation, which reached record levels during the year, mainly due to the accommodative monetary policies adopted during the pandemic period, which led to unprecedented levels of high debt in many economies. Reached.
As part of its efforts to curb inflation, the Federal Reserve raised interest rates by an accelerated pace of 425 basis points this year, and continued to adopt an accommodative tone in its latest statement, hinting at further rate hikes in 2023. Global central banks followed with interest as well. rate hike policies. The unusual rise in interest rates was reflected in a sharp decline in negative bond yields as the European Central Bank and other European countries and Japan abandoned their negative interest rate policy. Gulf central banks have also largely followed the lead of the US Federal Reserve in raising interest rates in an effort to maintain the peg of their currencies to the US dollar.
Credit Rating and Interest Rates
Since the beginning of the year 2022, credit rating activities have mainly focused on sovereign issuances of European countries during the first half of the year against the backdrop of the Russian/Ukrainian war. However, the second half of the year has seen measures relating to Africans. economies apart from other developing and emerging economies. Credit rating procedures were almost evenly split between raising and lowering sovereign ratings. According to data released by Bloomberg agency, this year credit rating agencies have taken about 25 measures to reduce and increase sovereign ratings.
And expectations for the year 2023 showed the rating moved to the downside due to higher interest rates, testing the debt growth and ability of economically weaker countries to service debt. This was echoed in a recent World Bank report that showed a sharp rise in debt vulnerabilities faced by many low- and middle-income countries. The report said that high interest rates and slow global growth put many countries at risk of being pushed into debt crisis. The above risks also indicate that investors’ preference for risk aversion and higher-quality debt next year compared to the higher-yielding secondary bond market (lower-quality bonds) versus the better performance of investment-grade bonds this year. equipment trends. According to a Bloomberg report, realistic data also shows that in times of slowdown in economic growth, yields on investment-grade bonds often outperform those of lower-quality bonds.
The latest consensus estimates indicate that the US economy could slide into a recession of up to 65 percent, while annual GDP growth could fall to 0.3 percent in 2022, compared to an estimated 1.9 percent. Inflation is also expected to remain high, but could be halved. compared to its highest levels recorded in decades, which was around 8.0 percent, reaching 4.0 percent in 2023. Higher inflation rates raised interest rates by a cumulative rate of 425 basis points during the year to reach an average of 4.38. Percent.
Forecasts released by the US Federal Reserve indicate an interest rate hike of an additional 75 basis points in 2023, which would push the average to 5.1 percent, which is higher than the consensus forecast and indicates no rate cut Will be It starts before 2024.
Sovereign ratings on GCC countries remained in favor of positive measures in the light of two credit rating upgrades this year as compared to only one downgrade. Oman’s sovereign rating sees two upgrades from B+ to BB by Standard & Poor’s in April 2022, followed by another upgrade to BB in November 2022 with a stable outlook. Fitch Ratings upgraded Oman’s sovereign rating from BB to BB in August 2022.
This upgrade reflected an increase in oil prices, reflected in Omani financial indicators and the continued implementation of the financial reform program by the government. Standard & Poor’s raised Qatar’s sovereign rating from AA- to AA in November 2022. The upgrade reflected the government’s financial position, resulting from higher oil revenue in addition to lower interest costs due to the payment of outstanding debts by the government.
On the other hand, Fitch downgraded Kuwait’s sovereign credit rating by one notch to AA in February 2022 due to structural challenges and dependence on oil.
The value of fixed income instruments maturing by GCC governments over the next five years (2023-2027) is expected to reach US$199.3 billion, while maturity of corporate debt instruments will be slightly lower at US$169.1 billion.
It is expected that the value of bonds and sukuk maturing in the period 2023 to 2027 will remain high, and then gradually decrease for the remaining maturity period. An increase in the value of debt instruments maturing in the next five years indicates an increase in the number of short-term issues (maturities of less than 5 years) in 2020 and 2021, as governments raise funds to balance deficits during the pandemic . Most of those maturities are denominated in US dollars at 59.7 percent, followed by local currency issues in Saudi riyals and Qatari riyals at 17.2 percent and 7.7 percent, respectively. Furthermore, due to the credit rating levels of GCC governments, most of these maturities are of higher investment grade or A-rated instruments.
As far as the quality of debt instruments is concerned, traditional bonds are in the lead, as the value to be repaid over the next five years represents approximately $230.1 billion, while the value of outstanding sukuk is expected to reach $138.3 billion.
With respect to individual maturities per country, Saudi Arabia leads the way in terms of the largest value of debt instruments due for repayment over the next five years, surpassing the UAE. The Kingdom is expected to see USD 125.0 billion of fixed income instruments maturing by 2027, followed by UAE and Qatari issuers with USD 109.8 billion and USD 73.1 billion, respectively.
At the regional level, the value of outstanding debt instruments of the banking and financial services sector will reach $118.4 billion over the next five years, representing approximately 70.0 percent of the total value of debt instruments outstanding by companies and 32.1 percent of the total amount. payable. in GCC countries by the year 2027. It was followed by the energy sector, with debt instruments valued at $19.6 billion, or equivalent to 11.6 percent of the total outstanding of Gulf companies by the year 2027. , then the public utilities and consumer sectors, with a value of $10.7 billion and 6.0 billion USD, respectively.
Banks operating in the UAE lead in terms of highest value of debt instruments over the next five years with a value of $49.7 billion, followed by Qatar with a value of $27.0 billion. Banks operating in the two countries account for 20.8 per cent of the total maturity of bonds/Sukuk in GCC countries for the next five years. The value of dues in the real estate sector is mainly concentrated in the United Arab Emirates and Saudi Arabia, which are expected to reach $5.5 billion and $3.5 billion, respectively, by 2027.
The maturity structure is also gradually changing due to the increasing issuance of permanent securities. According to data released by Bloomberg agency, 2022 saw an increase in the issuance of perpetual securities for the eighth consecutive year. The value of issuances rose to a record high during the current year, reaching $11.4 billion in 2022 as compared to $9.6 billion in 2021.
Prediction for the year 2023
For the year 2023, we expect tighter monetary policies implemented around the world to contribute to lower aggregate value of issuance, which will be more impacted by global recessionary pressures. Inflationary trends in the bond market will continue to be the main pillar of stability as it will determine the path central banks take to manage the economic outlook. However, economic growth in the GCC region is expected to outpace global growth, as market activity in development projects, which had declined over the past few quarters, is expected to recover, which should encourage fixed income issuance in GCC countries. Will give ,
It is expected that the value of GCC bonds and Sukuk maturing in 2023 will reach $67.5 billion, and the refinancing of these bonds and Sukuk is expected to represent the largest portion of issuance by companies and governments in the region. However, higher borrowing costs and stronger profitability and cash generation are expected to reduce some refinancing activity in the near term. We also expect to be charged for new issues after selling them once global interest rates and exchange rates have stabilised. We expect the exporting companies to return to the market in the second half of the year when market conditions are favourable. It is expected that sovereign states in the GCC countries will record fiscal surpluses on the back of higher oil prices, which will limit the total value of the issuance, and since diversification is a primary goal for most governments, we expect project issuances during this period. can be expected to do. year. Furthermore, sovereign entities in the region still need medium to long-term financing to meet their long-term strategic vision. We expect total fixed income issuances to remain stable or increase modestly in the range of $80 to $85 billion in 2023, reflecting the above factors.