GCC LCY Bond Market Primer

Growth of the GCC debt capital markets in the first decade of this century was relatively stunted as region’s need for debt funding was negligible in the face of abundant liquidity ensuing from high oil prices. Since 2014, GCC sovereigns have been experiencing substantial problems in balancing their budgets as oil revenues dropped amid structurally difficult to curtail expenditures. Therefore, tapping the capital markets for funding government budget deficits became the need of the hour, consequently creating the environment for rapid growth of the debt capital markets in the region.

GCC debt markets have traditionally been dominated by USD denominated bonds. However, recently, local governments have made notable advancement for deepening the local currency debt markets (LCY) by creating public debt management units, articulating debt management strategies and launching benchmark issues for building yield curves. There has also been substantial improvement in market infrastructure and regulations.

As at April 2019, total outstanding in the GCC bond market (USD + LCY) is circa equivalent of USD 519 billion excluding short term securities, i.e. securities issued with less than one year to maturity, and T-bills issued by local central banks.  Of the total, 63% is issued in USD (USD 327 billion), 33% in local currencies (equivalent of USD 170 billion) and remainder in other currencies such as Euro, JPY, CNH, AUD etc. Saudi bonds account for 38% of the market, followed UAE at 25% and Qatar at 20%.

Though GCC LCY markets have seen material growth in the last five years, the development is uneven across the six nations. As a percentage of GDP, those in Bahrain and Qatar are the largest and relatively the most developed while those in UAE and Kuwait have lagged behind. Of the USD 170 billion in the LCY bond market, Saudi Arabia accounts for 66% (USD 112 billion) while UAE is less than 1% (USD 1.04 billion).

So far issuance in the domestic debt market has remained skewed towards government debt as governments have sizeable funding needs while borrowing needs of large corporates remains limited in the face of slow economic growth in the region. Though capital market borrowings by local corporates has increased, large firms find it cheaper and more convenient to raise money in global capital markets than in the local currency markets.

Most issues in the LCY market are unrated but expected to have credit quality better than average found in other emerging economies given their linkage with highly rated governments.

USD dominates GCC markets

Source: Bloomberg, Emirates NBD Research

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