Muscat – The oil price rally this year has significantly improved the economic outlook of GCC countries and sharply reduced the borrowing needs of sovereigns and corporates in the region.

GCC governments were in a much stronger footing at the start of 2022 than the previous two years, mainly led by full resumption of economic activity post the pandemic that led to faster growth in the region, Kuwait-based Kamco Investment said in a research report.

As the borrowing needs of GCC states remain significantly lower this year against previous two years, GCC debt issuances sharply declined during the first five months of 2022, mainly on the back of better fiscal position of the regional governments backed by elevated oil prices as well as a pick up in economic activity.

As per the Kamco Investment report, total fixed income debt issuances in the GCC dropped to US$37.2bn during the first five months of 2022 as compared to US$61.9bn during the corresponding period in 2021, registering an year-on-year decline of 40 per cent.

Saudi Arabia and the UAE remained the top fixed instrument issuers in the region with issuances of US$24.2bn and US$7.9bn, respectively, this year. The decline in issuances were seen across the board with all the issuing countries seeing a decline this year.

Oman had no fixed income issuances this year as compared to US$6bn in issuances in 2021. The UAE witnessed the biggest absolute decline in issuances with total issuances at US$7.9bn this year as compared to US$20.3bn in the first five months of 2021, a decline of US$12.4bn. Saudi Arabia, on the other hand, witnessed the smallest decline of merely US$0.3bn resulting in almost flat year-on-year issuances.

GCC corporates witnessed a 47.7 per cent year-on-year drop in fixed income issuances in the first five months of 2022 whereas government issuers reported a relatively smaller decline of 30.1 per cent.

In terms of type of instruments in the GCC, sukuk issuances once again overtook bond issuances with total sukuk issuances at US$25.4bn in the first five months of 2022 as compared to US$11.9bn worth of bonds during the same period. Both government sukuks and corporate sukuks witnessed growth during January – May period of 2022 registering growths of 42.7 per cent and 6.7 per cent, respectively.

For bond issuances, corporate bond issuances declined by 62.8 per cent during the first five months of 2022 at US$9.9bn, whereas government bonds issuances declined by a steeper 87.3 per cent to US$2bn this year from US$15.6bn during the corresponding period of last year.

Outlook

Bonds and sukuk maturities in the GCC is expected at US$24.4bn for the remainder of 2022 and the refinancing of these is expected to account for the bulk of the issuances by corporates and governments in the region, Kamco Investment said.

‘The higher cost of borrowing is expected to discourage some refinancing activity in the near term. For the full year 2022, we are expecting a steep decline in issuances as a result of decline in issuances from both the government as well as corporates,’ the report added.

The year 2021 saw GCC corporates offsetting a decline in debt issuances from governments but the aggregate issuances witnessed a decline versus 2020. In 2022, the decline is expected to be steeper as both corporates as well as governments are expected to see a decline in issuances, the Kamco Investment report noted.

‘Governments in the region are eyeing fiscal surpluses after years of deficits backed by elevated oil revenues. Corporates, on the other hand, may see a decline in issuances mainly led by higher rates and its impact on overall economic activity,’ the investment firm said.

Fiscal deficits for the GCC countries are expected to see a steep decline this year mainly backed by higher oil revenues coupled with full resumption of economic activity as compared to the previous two years.

According to the forecasted general government balances of IMF, the GCC region is expected to see aggregate fiscal surplus of US$152.2bn in 2022 followed by a surplus of US$147.8bn in 2023.