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Kuwait Price Index up by 19% in Jan 2017

Date : 09/02/2017
Author:  Marmore MENA

According to Marmore’s recently released Monthly Market Review, MENA bourses had a positive start to the year 2017, with nearly all markets ending the first month in green. Kuwaiti Price and Weighted indices led the charge, rising by 18.9% and 12.4%, respectively, followed by Bahrain (6.8%). Saudi Arabia and Oman were the only markets to register a fall in January, falling by 1.5% and 0.1%, respectively. Various reasons are being touted for the 14-day consecutive rally in the Kuwait bourses, but a look at the top five stocks by value traded suggest that main activities are largely in large cap companies. The appointment of the new chairman and a series of market reforms may have led to investors hoping that steps might be taken to boost foreign inflows, following the regional peers UAE, Qatar and Saudi Arabia. Also, with Pakistan upgraded to MSCI Emerging Markets Index, Kuwait and other countries could see increased representation in the MSCI Frontier Markets Index.

MMR_Feb_17_fig1.jpg


With the fall in oil output, in line with the OPEC agreement, many of the Saudi sectors were affected, with losses posted in Banking, Retail, Hotels & Tourism and Transport sectors. Corporate earnings across all sectors rose by 2% in 2016, but earnings in Banks and Materials companies fell by 5% and 8%, respectively. S&P GCC grew by 1.6% in January, to close the month at 101 points.

MENA markets witnessed an upswing in momentum in January, with volumes rising 53% and value traded 3.7%. All MENA markets, barring Saudi Arabia, witnessed a rise in market liquidity in December, with Kuwait, Bahrain and Abu Dhabi leading the charge. Value traded in Kuwait stood at USD 3.9bn in January, compared to USD 9.5bn for the whole of 2016. In terms of valuation, P/E of Morocco (20.7x), Kuwait (17.9x), and Qatar (15.4x) markets were the premium markets in the MENA region, while the markets of Egypt (7.7x), Dubai (9.9x), and Bahrain (10.0x) were the discount markets.

Blue Chips also had a positive month, with Kuwaiti large caps dominating the best GCC performers in January. Shares of Zain, Kuwait Finance House, National Bank of Kuwait and Kuwait Projects posted double-digit growth, at 20.7%, 14.8%, 12.3% and 12%, respectively. Saudi Telecom (-7.6%) and Emirates Telecom (-4.8%) lagged behind the rest. Kuwait Finance House and National Bank of Kuwait also posted positive growth in 2016 earnings, as revenues grew, while Saudi Telecom witnessed an 8% fall in profits. Q4 profits for SABIC were positive for the first time in ten quarters, which indicated that  the worst might be over for Saudi Arabia's petrochemical sector, since the fall in oil price and government austerity measures raised the cost of gas feedstock. Qatar National Bank has reported a 10% jump year-on-year in net profit to USD 3.4bn for the year ended 2016, helped by stronger core earnings.

New Year Reforms and Bond Issuances
Saudi Stock Exchange is set to introduce settlement of trades within two working days of execution (T+2) during the second quarter of 2017. Tadawul also published draft rules for short-selling, and the borrowing and lending of securities. Presently, trades must be settled on the same day, which has inconvenienced foreign investors in particular, as they must have large amounts of money on hand before trading.

The Saudi cabinet approved an IMF-backed value-added tax (VAT) to be imposed across the Gulf, following the slump in oil prices. A 5% VAT will be levied on certain goods, following an agreement with the GCC in Jun’16. The move is in line with the IMF recommendation for Gulf States, to impose revenue-raising measures including excise and value-added taxes to help adjust to the low oil price environment that has slowed regional growth. The GCC countries have also agreed to implement selective taxes on tobacco, and soft and energy drinks this year.

The government of Oman has approached banks for an international bond issue with tranches of 5- and 10-years as the country plugs a budget deficit caused by lower oil prices. Oman's budget deficit is forecast to be USD 7.8bn in 2017, and the finance ministry has stated that it would cover this year's deficit with USD 5.5bn of international borrowing, USD 1bn of domestic borrowing and the drawdown of USD 1.3bn from financial reserves. Last year, the government raised a USD 1bn international syndicated loan in January, and issued tranches of 5- and 10-years international bonds worth USD 2.5bn in June, followed by another issue of USD 1.5bn in September.

Oil Market Review
Brent crude fell by 2 per cent to close the month at USD 55.7 per barrel, having maintained the price level at above USD 50 per barrel for all of January. OPEC nations Saudi Arabia, Kuwait, Algeria cut production in January more than they had originally committed to, while Russia followed suit and trimmed production faster than was initially agreed. However, rising US rig count and output put a cap on any oil price growth, as the US President had vowed to increase production.

Tags:  Bonds, Capital Markets, GCC, Oil, Stock Market

Ratings:
 Current rating: 0 (3 ratings)

GCC debt deluge: big-ticket issues, even by international standards

Date : 01/12/2016
Author:  Marmore MENA

GCC debt deluge

The GCC is raining debt issuances. From almost nothing a few years ago, all we hear and read these days is the jumbo-sized bond issuances from Saudi Arabia, Qatar, Kuwait, Bahrain, Abu Dhabi etc. The Saudis just closed a successful US$17.5 billion issue that was oversubscribed by more than four times, while Qatar raised $9bn in May followed by a $5bn sale by Abu Dhabi. Even by international standards, these are big-ticket issues.

Why such a sudden rush to issue bonds overseas?

The straight answer should be the growing fiscal deficit or budgetary gap between income and expenses. The IMF expects that GCC deficit to touch nearly $400bn cumulatively between next year and 2021. That’s huge in size measured by any standards. Having missed diversification opportunities several times in the past, it is nearly impossible to bridge this gap through non-oil income such as taxes and levies. More importantly raising non-oil revenues through a reduction in subsidies can be contentious and unpopular. Given the welfare economic model where GCC citizens are taken care of from cradle to grave, such sudden rushes to roll back subsidies can unsettle the social contract that the citizens enjoy. Given these constraints, the deficit can only widen or at best remain where the current estimates lie.

Hence there are only two options: dip into reserves or borrow. Saudi Arabia tried the first method last year, when its reserves drained from $731bn to $615bn. However, it reversed course and resorted to borrowing. It started with domestic borrowing before venturing overseas.

So why are GCC countries sitting on vast reserves and a deep banking sector and resorting to global bond issuances? The answer to the first question is simple: the opportunity cost of reserves is far higher than the cost at which monies can be raised. In other words, monies parked in reserves earn far more than cost incurred to raise similar sums. Although the Fed is on an interest-rate increase mode, rates are still at very low levels. What better time than now to borrow? Regarding the second question as to why global and not domestic, there is capacity issue for local banks. Also governments may fear that local issuances can crowd out credit growth for the private sector.

So are these bond issuances a sustainable strategy for the long term? Given the low debt-to-GDP ratio for key GCC countries, this appears a good and sustainable strategy. Overseas leverage levels are becoming unsustainable thanks to Japan (250 per cent of GDP), Europe (91 per cent) and the US (108 per cent). The current debt level of the GCC, at 15 per cent, appears very modest.

So what should we be worried about?

Many things. Firstly, increased debt-to-GDP ratio raises the risk of a lower credit rating. Already, Bahrain has fallen from investment grade to junk grade. Rapid deterioration in credit rating will mean higher cost of capital for future issuances. Secondly, credit default swap spreads (an indicator of risk perception) will spike. It is already increasing. Thirdly, the spurt in debt issuances is happening without proper debt management infrastructure. GCC governments should install a well-run debt management office if they have to broad base investors in these bonds. Finally, an active secondary market for these issuances is a must to develop the much-needed yield curve. A GCC secondary market totally dedicated to dealing only in bonds can be a good idea given the scale of bonds to be issued but a lot of work would be needed to build it. This would also help corporates jump on the bandwagon of raising debt. Presently, corporates depend near totally on the banking system.

So the fruit may be hanging low, but can be sour if not managed properly.

The article originally appeared in The National | Business.

Tags:  Bonds, Debt Issuances, Economy, GCC

Ratings:
 Current rating: 0 (3 ratings)

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