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Middle East

Asian capital looks to Middle Eastern debt

Middle Eastern issuer and Asian investor cooperation looks set to grow. Low oil prices have reduced domestic liquidity in the GCC and the need to finance budget deficits, combined with a stabilising of Asian currencies and the liquidity ‘surplus’ in these regions means capital is likely to naturally flow from Asian issuers to Middle Eastern borrowers.

Oct 4, 2016 // 8:50AM

The Saudi based Arab Petroleum Investments Corporation (APICORP) has issued US$300mn in 5-year floating rate Formosa bonds – or bonds that are issued in Taiwan, but in a currency other than the new Taiwanese dollar.

The move is a sign that there will be increasing cooperation between Middle Eastern issuers and the Asian investor base.

Historically Gulf issuers have rarely tapped the Asian markets, largely because oil prices – and therefore domestic liquidity – were higher.

“There has previously been little incentive from GCC issuers to seek international investors sitting miles away,” said Anita Yadav, head of fixed income research at Emirates NBD, adding that given the tighter liquidity conditions on the ground in the Middle East, issuers were now making the effort to market themselves to a wider audience.

Asian investors have also tended to avoid Middle Eastern debt, although since a number of Asian currencies have recently stabilised following a period of volatility over the last two years, Asian interest in Middle Eastern debt is likely to pick up.

“Reduced currency volatility has lowered the cost of hedging the currency exposure, encouraging issuers and investors to engage with each other on non-domestic currencies.”

The fact that most GCC currencies are pegged against the US dollar lowers the risk of a negative impact on an issuer’s financial health if the dollar strengthens, further increasing the attractiveness of the region’s debt to foreign investors – particularly with the US Fed now expected to hike either in December or early next year.

GCC issuers are also generally better rated and have higher financial profiles compared to their Asian counterparts. Added to this, weak oil prices over the last year and a half have lowered the cost of GCC risk substantially according to Yadav, meaning that debt from the region now appears attractive in relation to many Asian bonds.

Increasing cooperation between Asian investors and Middle Eastern borrowers appears set to continue.

Asian economies are generally well diversified, and their relatively strong showing means they have high savings rates Yadav stated, adding that the insurance and pension industry across the region is growing at a good pace.

“These factors support investable capital from Asia, which is met with the high funding needs in the GCC region as governments look to service their budget deficits,” she said. “It will be a natural course of events as capital flows from surpluses in Asia into deficits in the Middle East and GCC.”

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