Lower oil prices push up GCC sovereign yields

The sovereign yields of the Gulf Cooperation Council (GCC) states rose in 4Q14 following OPEC's decision to refrain from cutting production to support oil prices, though yields have since returned to previous levels, a specialized economic report showed Wednesday.
The report, by the National Bank of Kuwait (NBK), stated that investors questioned fiscal sustainability under weaker oil revenues following the significant decline in oil prices.
"The impact varied across sovereigns, with Dubai and Bahrain seeing the largest yield rises, while Abu Dhabi was the least hit. The turmoil also appeared to negatively affect issuance, which declined in the second half compared to the year before. As a result, growth in the outstanding stock of debt eased," reads the report.
"Dubai and Bahrain yields saw the largest increases with yields on their 5-6 year paper increasing by 85-90 bps. Saudi Arabia and Qatar experienced milder rises while Abu Dhabi actually saw yields decline." It pointed out that the sovereign credit default swaps (CDS) grouped GCC sovereigns in a similar manner, with Dubai and Bahrain seeing their CDS rates shoot up while the rest were relatively unaffected. Sovereign yields have since returned to normal, though CDS rates remain at elevated levels.
"Perceptions of the vulnerability of the fiscal positions of each sovereign appear to explain the different market responses across the GCC Sovereigns with large fiscal reserves, such as Abu Dhabi, Saudi Arabia and Qatar, dictated lower risk premiums; those with smaller buffers against the decline in oil prices, such as Dubai and Bahrain, saw yields and CDS rates increase more notably. Kuwait and Oman have no traded sovereign bonds and are thus excluded from this comparison," added the report.
It argued that the global economic unease and volatile oil prices have also contributed to weaker debt issuance in the second half of 2014. Issuance in 2H14 came in at a relatively weak USD 16 billion (gross), dampening an outstanding first half that benefited from brighter economic prospects.
"Issuance during 4Q14 was the weakest in three years. Weak issuance coupled with the maturity of several large issues earlier in the year, led the GCC's stock of debt to post its slowest net growth rate yet; it ended the year up by 3.5 percent, adding a net USD 8.5 billion to the debt stock during the year." Moreover, the report noted that most of the weakness in issuance was in the non-financial sector which made little contribution to total issuance in the second half of 2014. The sector added USD 1.1 billion, as uncertainty may have continued to suppress the sector's interest in tapping regional debt markets.
"Issuance for this sector was down 15 percent for the year to USD 14.5 billion. The weakness in issuance extended to the financial sector as well, which contracted by 18 percent in 2014 Financial sector issuance is closely tied to credit growth, a leading indicator, and the new capital adequacy framework, "With GCC credit growth expanding at a healthy pace, financial sector issuance is expected to pick up going forward to accommodate the region's growing credit needs." The data also showed that sovereign issuance increased by 6.9 percent in 2014, driven by refinancing opportunities in a low rate environment The year also saw the participation of less active sovereigns, possibly reflecting wider acceptance of debt as an alternative source of financing. This included Oman and Bahrain, the two countries most vulnerable to the oil price declines.
It added that the UAE remained the largest issuer of debt with more than USD105 billion outstanding. The Saudi Arabia saw the most rapid growth, expanding its stock of debt by 21 percent to USD61 billion over the past year. Meanwhile, Qatar saw its stock of debt decline by 16.4 percent to USD 61 billion from its peak of USD 78 billion in 2013.
"Debt issuance is likely to recover this year, with rates still low and borrowing needs very likely to rise. In the current environment of lower oil prices, governments are likely to need more debt to finance fiscal deficits. Also, with the region's economic outlook still healthy and substantial capital spending plans, private borrowing needs are expected to remain large," the report concluded.