Seller’s market: Debt market sees a jump in activity, as local and regional infrastructure projects flourish

With some analysts suggesting that the 2017-20 period could see as much as $480bn in combined government expenditure across the GCC – with $288bn of that to be spent in transport and infrastructure projects alone – the region clearly maintains a considerable appetite for major capital investment.

FINANCING NEEDS: In a lower oil price environment, however, GCC countries also face major challenges when it comes to funding these giant schemes. Dubai is no exception, with Expo 2020 rapidly approaching, alongside a host of other major projects. This dynamic has led to a surge in the debt market across the region, and governments have been issuing sovereign paper to fund enlarged budget deficits.

GCC issuers launched a then-record $72bn worth of bonds in 2016. The majority of these were sovereign debt, as the combined fiscal deficit of the council’s members reached $193bn. This growth in debt continued in 2017, with an uptick in oil prices encouraging governments to increase their spending. In Dubai, the Dh47bn ($12.8bn) 2017 budget included a 27% increase in infrastructure expenditure and a planned deficit of Dh2.5bn ($680.5m).

Meanwhile, corporates have also sought to boost their positions through debt issuance. With Dubai prominent among the GCC states talking of increasing private sector involvement in infrastructure and transport development via vehicles such as public-private partnerships, there is also a growing need for corporate fundraising, and debt instruments remain a powerful option.

In 2017 sovereign issuance in the region pushed bond offerings to a new record of $85bn. Sovereign bonds accounted for more than half, or $50bn, of the total, according to Bloomberg data.

Yields were also good for investors in 2017. The highest performing in the GCC during the first 10 months in terms of US dollar-denominated bonds of $1bn or more was Dubai’s state-owned global port operator DP World. Its debt due in 2037 had returned 21% to investors as of October 27 that year. Higher yields in the region than in many developed markets have attracted interest from international funds, spurring further issuance.

Other Dubai-based debt issues garnering attention included Emirates NBD’s $750m conventional bond issued on Nasdaq Dubai in November 2017. The bank is the largest issuer of conventional bonds on the exchange, with eight listings totalling $5bn. This was a major slice of the $9.08bn in conventional bond issuances by Dubai-based companies on Nasdaq Dubai at the time. However, there are challenges. Yields spiked and a sell-off of regional bonds hit in late 2017 due to additional political risk, stemming from events in Saudi Arabia and Lebanon.

The Qatar crisis had a similar – if shorter-lived – effect earlier in the year. At the same time, the domestic market remains relatively undeveloped in Dubai, with efforts to deepen the market and develop a yield curve still ongoing (see overview).

FOCUS ON GREEN BONDS: While the need to finance major infrastructure projects will continue to give greater impetus to market development, one new step in the year ahead may be in the green bonds segment in Dubai and in the region given the quantity of large-scale renewable energy, and sustainable building and industry projects being rolled out. Neighbouring Abu Dhabi issued the first such instrument in the UAE in March 2017.

Dubai has set up the Green Fund, which aims to raise some $27bn to support investment in new green energy projects. While part of this will likely come from the emirate’s sovereign wealth fund and other government-linked entities, there has been a call for some of the financing to be raised via green bond issues, given the huge size of the target. The year ahead, then, will likely see debt markets continue to be busy, both across the GCC and in Dubai.