Muscat – Higher oil income significantly improved economic and fiscal outlooks of the GCC countries this year and sharply reduced the borrowing needs of sovereigns and corporates in the region. As a result, fixed income debt issuances in the GCC recorded a steep decline during 2022.

As GCC sovereigns are expected to report fiscal surpluses for 2022, fixed income debt issuances in the region have dropped by 41 per cent year-to-date this year, according to a report released by Kuwait-based asset management firm Kamco Invest.

“Fixed income issuances in the GCC witnessed a steep decline during 2022 led by lower issuances from both sovereigns and corporates. The decline in government issuances mainly reflected higher oil prices that lowered the funding requirements. On the corporate side, the decline was led by rising interest rates as well as high equity valuations that made raising funds from the equity markets more enticing verses the bond market,” Kamco said.

On the economic front, Kamco said, the GCC governments are expected to record one of the highest annual GDP growth rates this year led by thriving economic activity post the pandemic, in addition to elevated government spending in the project market.

“According to consensus estimates, GCC economies are expected to clock a GDP growth rate of 7.3 per cent in 2022 as compared to 2.5 per cent in 2021. Growth in 2023 and 2024 are expected to be relatively smaller at 3.4 per cent and 2.9 per cent, respectively,” Kamco noted.

It said that sovereign rating actions in the GCC favoured positive actions with two upgrades during this year as against one downgrade.

Oman’s sovereign rating witnessed two upgrades this year by S&P from B+ to BB- in April 2022 followed by another upgrade to BB in November 2022 with a stable outlook. Fitch also upgraded Oman’s sovereign rating to BB from BB– during August 2022. The upgrade reflected higher oil prices that was reflected in Oman’s fiscal metrics and the government’s ongoing fiscal reform program.

As per Kamco’s report, GCC governments are expected to see US$199.3bn in fixed income maturities over the next five years (2023-2027), whereas corporate maturities stand slightly lower at US$169.1bn.

“Both bond and sukuk maturities are expected to remain elevated starting from 2023 until 2027 and then gradually taper for the rest of the tenor. The higher maturities during the next five years reflects a number of short-term (less than five-year maturity) issuances in 2020 and 2021 as governments raised funds to plug-in deficits during the pandemic,” Kamco said.

A majority of these maturities are denominated in US dollar at 59.7 per cent followed by local currency issuances in Saudi rial and Qatari rial at 17.2 per cent and 7.7 per cent, respectively, the report mentioned.

In terms of type of instruments, conventional bonds dominate with US$230.1bn in maturities over the next five years, whereas sukuk maturities are expected to be at US$138.3bn, it added.

2023 outlook

For 2023, Kamco expects that tighter monetary policies globally would limit overall fixed income issuances in GCC that would be further dampened by global recessionary pressures.

As per the report, GCC bonds and sukuk maturities are expected at US$67.5bn for 2023 and the refinancing of these instruments are expected to account for the bulk of the issuances by corporates and governments in the region.

“That said, the higher cost of borrowing and strong profitability coupled with cash generation is expected to discourage some refinancing activity in the near term.”

“We expect fresh issuances to be back-end loaded once stability is seen in global interest rates and exchange rates. We expect corporate issuers to come back to market during the latter half of 2023 once market conditions seem favourable,” Kamco said.