DEBT CAPITAL MARKETS
The balancing act Tapping the international debt markets will help the GCC countries to plug their budget deficits as well as current account shortfalls without having to draw from their sovereign wealth funds
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he outbreak of the COVID-19 pandemic and its impact on the price of oil, which is the backbone of the GCC countries’ revenues, forced regional governments and corporates to calibrate their budgets in line with the current conditions. Given the importance of hydrocarbons as a component of GDP, exports and revenues for Gulf countries, the high correlation between oil prices and GCC financial markets will remain a permanent fixture for now. According to S&P Global, “Normally, issuance and GDP are positively correlated – as GDP rises (or falls), so does bond issuance.” But this relationship was reversed throughout 2020 and changes are expected to be seen through 2021. The stimulus packages that Gulf central banks unveiled at the height of the pandemic last year are available through most part of 2021 making a significant difference, especially in rejuvenating market confidence by providing a backstop. After a record issuance in 2020, industry experts do not expect
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Gulf states to tap international debt markets as much in 2021 amid economic recovery on the back of rebounding o i l p r i c es a n d we l l - c o o rd i n a te d inoculation programmes. Despite the recovery of the economy, GCC countries and regional corporates still needs to borrow, and countries in the region will continue to issue bonds through December 2021. Tapping international debt markets will help the GCC countries to plug their budget deficits as well as current account shortfall without having to draw from their sovereign wealth funds. Saudi Arabia projected a budget deficit of $37.6 billion (SAR 141 billion) in 2021, Oman foresees a budget deficit of $5.7 billion (OMR 2.2 billion) while Bahrain expects to post a deficit of $3.20 billion (BHD 1.2 billion). Though a decline in debt issuance is expected in 2021, other supporting factors include still-favourable financing conditions, corporates’ CAPEX needs, increasing amounts of sovereign debt with negative yields and a rejuvenated
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merger and acquisition pipeline for corporations, said S&P Global.
Enabling conditions In 2020, international debt markets conditions were favourable to the extent that some of the corporate sectors that saw a surge in bond issuance compared to the previous five years were those most negatively affected by the economic fallout from the coronavirus pandemic. Last year’s conditions did not only allow many issuers to issue new debt, but the markets were also receptive that yields continue hitting all-time lows on new issuances for both corporates and sovereigns. Similarly, alongside very low yields, debt maturities have been lengthening, particularly for investment-grade - rated ‘BBB-‘or higher – corporations in developed countries as well as emerging markets. S&P Global said that these conditions have raised leverage for many, which will likely act as a headwind to issuance in 2021 as corporates try to lower leverage but these favourable conditions could
