Debt Issuances in MENA
Debt markets in MENA region have historically remained relatively smaller in size and underdeveloped. Based on IMF data, Debt to GDP ratio for Middle East and Central Asia region stands at 47.3% in 2022, which is lower than European Union (85.3%) and G7 Economies (128.4%). Though the smaller size offers scope for growth, primary market issues are relatively lower and skewed towards long-term maturities and often promote buy and hold strategies which has resulted in shallow secondary markets devoid of liquidity. However, the coronavirus pandemic coupled with an historic fall in oil prices resulted in an economic fallout, leading to several gulf states looking at alternatives to bolster their finances, with 2020 witnessing a slew of sovereign issuances from most of the MENA countries. The trend continued in 2021 and 2022, with the sovereign segment taking advantage of the low interest rate scenario to tap the bond markets.
Motivation behind the issuance:
Large-scale spending on infrastructure projects and providing support to the respective domestic economies is the main reason for sovereign issuances. Taking the example of KSA, the Public Investment Fund (PIF, KSA’s sovereign wealth fund) made its debut in the international bond market by selling its first green bond (USD 3 billion, on the London Stock Exchange) with a 100-year maturity period. The PIF serves as the primary implementing agency for the transformative Vision 2030 economic development plan of the country, which involves the execution of numerous giga-projects, including the futuristic city of Neom, which requires an investment of around USD 500 billion. As a result, the PIF may require significant financing in the future. By tapping into the burgeoning green bond market, the PIF can access new liquidity pools at a favourable time.
Types of Bond Issuance
The MENA region bond market can be broadly categorized into sovereign bonds, corporate bonds, financial institution bonds and Sukuk. Islamic bonds, also known as Sukuk, are financial instruments that comply with Islamic finance principles. Sukuk, like traditional bonds, are debt securities that allow investors to earn a return on their investment by lending money to the issuer. However, there are some key differences between Islamic bonds and traditional bonds. One major difference is that traditional bonds pay interest to investors, which is prohibited in Islamic finance. Instead, Sukuk pay investors a return on their investment through profit-sharing or rental income from an underlying asset.
Top Issuers of Bond in MENA Region (USD, Millions)
Source: Refinitiv; Note: Bond issuance values in 2023 as of April 2023
Saudi Arabia’s government was the Middle East and North Africa’s biggest debt issuer in 2022 as it raised USD 5 billion, according to a report released by Refinitiv. The Kingdom’s administration was also in the lead when it came to the issuance of Islamic bonds, securing USD 2.5 billion. The UAE government came second in the ranking with USD 3 billion. Saudi Arabia was the largest sovereign issuer in the GCC in 2021 as well with a total of USD 39.5 billion, followed by the UAE with USD 13.3 billion. Given the size of the respective economies and the infra spending plans of KSA, the trend is likely to continue in the near future. MENA sovereigns issue a mix of foreign currencies (USD & Euro) and their respective domestic currencies. Domestic investors are largely banks who have a buy and hold strategy. However, it is difficult to ascertain if many international investors participate in such sovereign issuances.
Among the emirates, Abu Dhabi and Dubai are the biggest issuers followed by Sharjah which also issues bonds from time to time. For instance, in October 2022, Abu Dhabi sovereign wealth fund Mubadala sold US$1 billion worth bonds maturing in 10-1/2 years after drawing more than $4.2 billion in orders for the debt sale. Dubai's biggest bank Emirates NBD sold $500 million in five-year bonds in its first public debt sale of the year, which received more than $1 billion in orders.
According to data from Refinitiv, Islamic bonds raised USD 12.2 billion across the MENA region during 2022, reflecting a seven-year low as well as a 55% drop from 2021. As for sukuks, they accounted for one-third of the total bond proceeds in 2022. The top issuer of Islamic bonds was the Saudi government, which raised USD 2.5 billion in 2022. IsDB Trust Services accounted for the biggest sukuk issue from the financial sector, raising USD 1.6 billion. Islamic bonds worth USD 6.3 billion was issued during the first quarter of 2023, a 57% increase y-o-y. Sukuks account for 23% of total bond proceeds raised in the region during Q1 2023, versus 42% during Q1 2022. Financials accounted for the bulk of sukuk issuances at USD 4.8 billion while government and agencies issued USD 1.5 billion worth.
Green and sustainable debt issuance has been on the rise in the Middle East despite the relative lack of regulation of green financial instruments. According to reports, the total green and sustainable bond and Sukuk issuances in the GCC region last year amounted to USD 8.5 billion from fifteen deals, compared to USD 605 million from six deals in 2021. Most of the issuances were from Saudi Arabia, which accounted for more than half of the total volume, with the UAE accounting for the remainder. In 2021, all GCC issuances were from the UAE. Governments in the MENA region have set ambitious sustainability targets as part of their long-term development plans. Issuing sustainable bonds can help them raise funds for projects that support these targets, such as renewable energy projects, sustainable transport infrastructure, and social housing. Given that sustainable bonds are viewed as a significant step towards promoting sustainable development and addressing the social and environmental challenges in the region, the issuance of sustainable bonds from the MENA region could experience a growing trend. Following the 2022 United Nations Climate Change Conference (Cop27) in Egypt and ahead of the 2023 United Nations Climate Change Conference Cop28 in the UAE, the trajectory of the MENA region’s green finance market has taken on new significance.
While certain reports point out that the Eurobond issuances in the Gulf are on the rise, predominately issuances are dominated by US Dollar and local currency denominated issuances. Saudi government raised $5 billion through the first medium-term Euro-denominated bond programme. Saudi Arabia and UAE are largest issuers of Euro denominated bonds.
Challenges and Difficulties
The outlook for Middle East bond issuance depends on two major factors – the oil price outlook and US Fed rate. If oil prices remain stable at the USD 70-85 per barrel range, it is a comfortable level for most of the oil producing nations. Oil may be vulnerable to slowing demand, but OPEC, through its production cuts, should manage to keep oil prices above USD 70 per barrel, a supportive level for GCC sovereign credit profiles. With the US Fed expected to increase rates by a further 100 bps by the end of the year, some of the MENA sovereigns could use the current rates to raise debt rather than wait for the rates to rise.
Issuance of bonds also largely depends on funding needs for infrastructure and developmental projects. If oil revenue is higher, those years have witnessed subdued bond issuances. For instance, in 2022 when oil prices traded at an average of more than USD 70 per barrel, the sovereign and overall bond issuances in the GCC declined. Hence, GCC bond issuances are most likely to be determined by trends in the oil price. If oil prices witness a steep decline, it is likely that the bond issuances might increase. The equity capital markets are more developed compared to the debt capital markets in the Middle East. Lack of active sovereign and corporate issuances, underdeveloped infrastructure, lack of liquid secondary markets is some of the reasons behind the same in the GCC countries. For the GCC countries, the appetite for bond investments have been supported by stable economic outlook, positive ratings, financial buffers of the sovereigns apart from limited supply. Most of the bond issuances in 2022 were oversubscribed.