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More institutional, sovereign debt instruments likely to boost investment liquidity

 

-Economic growth, stable credit ratings driving economic values of new bond issuances across GCC

Government debt securities are significant financing instruments that can ensure lucrative investments, especially for banks. They are noted for their low risk and stable returns, through which the GCC governments have succeeded in maintaining a stable economic performance despite global economic fluctuations.

The volume of government bonds that were invested by Gulf banks during 2017 amounted to $193.5 billion, showing a 20% growth compared to $160 billion in 2016.

The development of various financing mechanisms and tools has been key to maintaining economic mobility across the Gulf region. Positive and stable credit ratings have also enabled region to gain access to international markets for large-scale financing that may not be available in regional banks.

On the other hand, the cost factor will play an effective role in determining the market and timing of success for issuing bonds and obtaining timely financing. It will play a role in ensuring continued government spending on development projects and plans to stimulate those economic sectors, which need more liquidity to achieve their long and medium-term objectives and development goals, primarily real estate activities.

According to the weekly report of Al Mazaya Holding, industry data indicated that issuance of corporate bonds in the UAE declined during 2018, in favour of a rise in issuing sukuk as the government continued to issue bonds of up to $19.1 billion against $39 billion in 2017.

Issuance of institutional bonds outweighed sovereign bonds, accounting for 72% of the total bonds, 28% of which are corporate during the past year.

The decline is a result of the successes made in local liquidity management and the rise in total revenues and spending, with an overall budget deficit expected to remain stable at 1.6% of GDP before turning to be a surplus in 2019.

Bonds issued by major economic sectors, primarily banking, industrial and air & maritime transport sectors, reflect stable economic performance as well as increased investor confidence in the financial performance of operating companies.

Al Mazaya’s report indicates that Sukuk and bond issues in Saudi Arabia are taking a deeper direction to finance the budget deficit, support economic stimulus plans and raise the capital of a number of development funds.

Issuing government and corporate bonds is on the rise, with total domestic and foreign debt securities reaching SAR 120 billion by the end of 2018.

The report noted that the continuing trend towards debt bonds contributed to the adoption of expansionary budgets to drive economic performance, at a time when the Kingdom adopted an ambitious budget, with spending amounting to SAR1.1 trillion for the current year and expected returns of up to SAR975 billion, an increase of 9% from last year, and a net deficit of SAR136 billion.

The report adds that such a level of financial performance would increase the pace of all economic activities and level of liquidity at the real estate market, which would ultimately improve the performance of non-oil sectors.

Al Mazaya Holding’s weekly real estate report noted that falling deficits prospects, coupled with the decent economic growth rates being achieved as well as the positive economic outlook granted by key rating agencies  are all factors that will increase the economic value of any new debt issuance this year at the institutional and sovereign levels. This also means giving the economic sectors, especially the real estate sector, more investment liquidity as a result of increasing investor confidence derived from a growing investment demand to buy bonds and sukuk.

Gulf economies and markets have seen a marked improvement in their 2018 performance, supported by higher oil prices, which have contributed to reducing budget deficits to $14 billion from $79 billion at the end of 2017, according to the report.

With strong economic growth indicators, companies become in need of more financing tools, which will reflect positively on the investment climate, providing more local and foreign investment liquidity that ensures more resilience and growth for  the private sector, enabling it to produce more real estate, industrial, commercial and tourism projects across the current year.