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MENA CDS activity of late is eerily reminiscent of the risk “contagion” caused by investors questioning Dubai’s debt-servicing capabilities in late 2009 when [irrational] fear spilled-over to Abu Dhabi as well even though the latter’s fiscal integrity was never seriously in question, a fact later confirmed when it underwrote a bailout. But if such objective measures are largely ignored in the market of default probability perception, perhaps it should come as no surprise that more nuanced, subjective ones such as the differences between the historical, social and economic dynamics of say, Saudi Arabia versus Egypt, also fail to be carefully analyzed. Even The Economist’s latest stability rankings, for instance (see chart)–the result of ascribing a weighting of 35% to the share of the population that is under 25; 15% to the number of years the government has been in power; 15% to both corruption and lackofdemocracy indices; 10% for GDP per person; 5% for an index of censorship and 5% for the absolute number of people younger than 25–seem inadequate. An accompanying piece, for instance, notes that in Saudi Arabia (whose marginalized Shia population is, unlike in Bahrain, a relative blip) the unity of unrest seen elsewhere may be structurally unlikely: “Building an opposition movement is difficult in Saudi Arabia. [While] grievances are plenty: about living standards, poor schools, lack of jobs, the government is adept at using repression, propaganda, tribal networks and patronage to divide and weaken any opposition. Middle-class liberals are wary of democratising steps that might give more power to anti-Western Islamists. State-backed clerics have denounced the Egyptian and Tunisian protesters, and issued fatwas against anything similar in Saudi Arabia. Only in the [admittedly oil rich] eastern province—home to a large Shia population—is there much tradition of protest. But community leaders there are cautious, and desperate to avoid any accusations that they are a ‘fifth column’ for Iran.” Barclays too notes that addressing how immediate tensions in the region may unfold is at least partially dependent on a given military: “Bahrain’s military is almost entirely composed of Sunnis and there is a significant foreign element in the ranks as well. Hence, they may be more willing to brutally suppress dissent than their Egyptian counterparts and the regime may not be as concerned about possible splits within the officer corps,” it wrote to clients. That said, perhaps such “nuance” is just noise from the collective market’s point of view. The real concern for Saudi Arabia may not be the emotional state of its Shias but rather the physical soundness of the 18-mile-wide strait Bab el-Mandab.
According to Mohieddine Kronfol (pictured left), managing director of Algebra Capital, a Dubai-based investment firm, pricing of Bahrain’s $750m, five-year sovereign sukuk (Islamic bond) issue–which is being managed by Calyon S.A., Deutsche Bank and HSBC and is expected to yield somewhere 340-350 basis points above similar maturity U.S. Treasuries–is on the “low end of expectations” and will thus limit liquidity. Abu Dhabi’s conventional April issuance yielded 400 points, for instance. “It would have been better had they left some juice in there to attract a wider audience,” he said, adding that more generous pricing would have helped to ensure secondary trading and liquidity “for the long-term interest of the region.” Yet critique of the pricing aside, Kronfol did admit that “the issue would be a success regardless the pricing, as Islamic banks in the region have enough liquidity to absorb it.” He also told Bloomberg that Algebra, which manages a fund dedicated to Islamic bonds, is investing in the issue.
Bahrain’s sukuk is the first Islamic sovereign issue from the Persian Gulf region this year. According to S&P, global sukuk markets fell by roughly 56% last year from 2007, down to to $14.9bn. Experts note that a mature sovereign bond market in the Gulf is needed to help serve as a benchmark for corporate issuers who, upon seeing adequate movement in the sovereign markets, can feel relatively secure in issuing higher-yielding paper with which to raise cash.
International Petroleum Investment Company (IPIC), an Abu Dhabi-based investment company, announced on Monday that it has been assigned Aa2/AA/AA long term credit ratings by Moody’s, Fitch Ratings and Standard and Poor’s, with a stable outlook. “While we have no immediate plans to raise external capital, the ratings will facilitate future engagement with the debt capital markets if IPIC wishes to pursue this,” commented its managing director, Khadem al-Qubaisi, who added that the ratings were a means of “reinforcing strong corporate governance principles and enhancing transparency.” According to one analyst, the ratings are “a signal that [state sovereign] funds are eager to keep spending and [are] willing to borrow to increase their buying power.”
IPIC’s ratings acquisition comes on the heels of a similar move by another Abu Dhabi investment arm, Mubadala Development Corp, which issued its first annual report last week and also recently announced plans to set up a medium-term bond program. According to news agencies, “both companies have taken on billions of dollars in debt to fuel their growth in recent years, some of which soon needs to be refinanced. That sets them apart from the secretive and far larger Abu Dhabi Investment Authority (ADIA), which likens itself to a pension fund and is not understood to seek out external sources of funding.”
Most importantly, the move is a another step in the early maturation of Gulf fixed income, on both a state and corporate level. In March, Abu Dhabi raised the first $3bn of a $10bn sovereign bond program to secure funds for state entities and to help develop a domestic bond market, while Qatar and Bahrain followed suit. Pundits at the time noted that such benchmarks are vital to the emergence of local credit markets, as corporate issuers in the region can ultimately price their own debt against them.
Financial Times notes today that “Bahrain will add to efforts by the Arab Gulf states to create an active bond market in the region by raising more than $1bn in a debt sale.” Abu Dhabi and Qatar have already sold $6bn worth of bonds in the past few months, the piece remarks, and are expected to issue more (and at longer maturities) along with Kuwait and Dubai. The country will sell $500m in sharia-compliant five year bonds—referred to as sukuk—at the end of May.
Bahrain’s bond market, while admittedly small, is nevertheless viewed as the only real bond market of the six Gulf states. This is because the region, already flush with oil revenue, hitherto had little need for it. Currently, outstanding debt constitutes only roughly 10% of the region’s GDP. But it is hoped that a thriving state bond market will help pave the way for benchmarks against which corporate issuers in the region can price their own debt.
Financial Times noted on Thursday that Bahrain, which is heavily dependent on its financial services sector, will sell nearly $800m worth of bonds in order to finance house building projects and bolster the island’s beleaguered economy. Moreover, other Gulf countries could be next in line, as Dubai, Oman and Saudi Arabia will all be running deficits in the coming year. However, the paper writes, Bahrain “has far smaller foreign currency reserves than its more hydrocarbon-rich neighbors.” Moody’s lowered its outlook on Bahrain’s debt rating to negative back in January, and several Bahrain-based firms have been downgraded or put on negative watch. That said, “most of the 400 financial institutions in Bahrain are offshore and unlikely to need state support.”
JGW
Frontier Markets 