In 2016 Kuwait was tipped to be one of the most anticipated sovereign issuers in the Middle East, with investor appetite heating up as Saudi and Qatari bonds were snapped up with little hesitation. But the Eurobond issuance, expected to be as large as US$10bn, was postponed several times.
Two factors were cited by analysts as key motives: the Saudi’s mammoth triple-tranche US$17.5bn offering, which hogged investor interest in the region, and Kuwait’s generally more stable short-term fiscal outlook, particularly when contrasted with other GCC countries.
Before a transfer of money to its sovereign wealth fund, Kuwait posted a budget deficit of KWD4.6bn (US$15bn) last fiscal year, its first deficit in 17 years; this year the gap is expected to more than double to KWD9bn (US$31bn), but is still dwarfed by Saudi Arabia’s US$100bn deficit.
So the consensus among observers was that, with no immediate threat to its balance, Kuwait was happy to bite the bullet and wait for more favourable market conditions.
“As a percentage of GDP Kuwait’s budget deficit has been lower for one significant reason: the country’s spending has been lower than its neighbours’,” explained a bank analyst based in the Middle East. “Kuwait hasn’t increased expenditure as much in the last 10 years, their spending was more controlled, so they were less susceptible to the drop in revenues.”
The stall on the sovereign debt sale did not stop the Kuwaiti corporates from tapping the international markets, with EQUATE Petrochemical paving the way with a US$2.25bn dual-series bonds.
It consisted of a US$1bn in long five-year notes maturing in March 2022, priced at 98.4% with a 3% coupon at a spread of 195bps, as well as US$1.25bn in 10-year bonds maturing in November 2026, priced at 98.781% with a 4.3% coupon at 270bp over mid-swaps.
The issuance was well received globally with an over-subscription rate of two-to-one and a global order book exceeding US$4.5bn, setting the benchmark for the upcoming sovereign offering. Furthermore, holding company Kipco posted a US$500mn 2023 bond at a yield of 5% in March under its US$3bn Euro Medium Term Note Program launched in 2006, while Burgan Bank SAK raised US$1.25bn from a note in September.
And this week, Kuwait National Petroleum Co (KNPC) reportedly selected 10 international banks, among them BBVA, BNP Paribas, Bank of Tokyo-Mitsubishi UFJ and Credit Agricole CIB, to provide a loan facility of more than US$4bn to back its Clean Fuels project, which entails the upgrade and expansion of two of Kuwait's largest refineries to allow for production and export of diesel and kerosene. The project already received a US$1.2bn (US$3.9bn) loan led by National Bank of Kuwait and Kuwait Finance House earlier this year.
“The syndicated loan market is very vibrant at the moment,” the analyst noted. “If you look at 2016, we have had roughly US$60bn issuances in the fixed-rate Eurobond and corporate bond space, while the syndicated loan market reached 94bn. The competition in the syndicated loan market remains reasonably high, so some of the corporates are not desperate to issue bonds when they can get the loans.”
Resistance to austerity
The government of Kuwait has been in no hurry to access international capital markets, preferring instead to tap into the reserves, but that situation may change over the next two months, as oppositional forces, consolidated around an anti-austerity platform, gain more political influence.
In November Deputy Prime Minister and Minister of Finance Anas Al-Saleh pledged to support the development of market bonds and instruments, which, he said, “was imperative for strengthening the country’s financial infrastructure.”
“Economic development will also include promoting the best uses of national savings by financing projects, meeting government’s needs and covering the budget deficit, as well as promoting the economic performance on all levels,” added the official.
While on paper this statement sends a positive message to the markets, realizing these plans may not be so easy. Notably, the hereditary emir still has the final say on policy, but Kuwait’s legislators hold more power than their counterparts in neighbouring states.
The rise to prominence of anti-austerity lobby is likely to make introduction and implementation of reforms and spending cuts more challenging, which in turn could hasten the bond sale.
“Slower progress than the rest of the GCC in economic diversification and implementing fiscal reforms in response to the oil price shock is in part because unlike other GCC countries, Kuwait's political environment is more liberal, allowing for unions and for parliament to criticise government policies,” said a Moody’s report on the recent dissolution of parliament.
Moody’s changed Kuwait's sovereign rating outlook to negative earlier this year, citing material uncertainties over the government's ability to effectively implement its fiscal and economic reform programme.
Commenting on Kuwait’s fiscal outlook, the analyst pointed out that, like other GCC states, Kuwait is struggling to balance the books, but in contrast to them, it tends to stay within the budget for each fiscal year, and she expects that historical trend to continue.
“We will see the budget announcement soon and know whether the country will be able to manage its fiscal targets, in terms of reforms and budget cuts, as they had planned earlier,” the expert commented. “But so far implementation of the austerity measures has actually been more effective than we expected.”
And as far as the debt market goes, Kuwait’s path towards a sovereign bond next year has been paved by other sovereign issuances, including Saudi Arabia and Qatar, as well as by its own corporates. The bank analyst pointed to two factors that will make its debt competitive in the GCC bond universe.
“One clear advantage is that so far there is no a Kuwait sovereign dollar-denominated bond in the market yet, although there are some of the corporates. For international USD investors, there is no way yet of getting exposure to Kuwait sovereigns, so in that sense we will see a scarcity value attached to the bond and I expect to see healthy appetite for it.”
“Secondly, it is a AA rated credit, which is very high quality. Out of six GCC states we have three that are lower categories – Saudi is A, Oman is BBB, and Oman is BB-. So, from that perspective, Kuwait is materially better placed and that will give investors a level of comfort.”
Bond or sukuk?
Looking at the potential size and maturity of the note, the analyst admits that there is little to go on, for now – the parameters will depend on market conditions at the time of the issuance.
“Kuwait’s leadership has alluded to the planned benchmark bond of a substantial size, and they seem to be close to launching it.”
The government is waiting for the right moment in the markets, with Fed rate uncertainty and upcoming winter holidays leaving little room for manoeuvre in 2016.
“We assume the deal is likely to arrive in Q1 2017 and it could be anywhere from US$5bn to US$10bn. Looking at the budget deficit, if they went for the full size, they won’t need to tap again in 2017. But they may choose to do 2 or more tranches, perhaps below the US$10bn maximum, depending on the market conditions and revenue streams.”
The bond’s parameters – type, size and duration, in turn, will also define the profile of investors it attracts.
“With sukuk, chances are it will be shorter dated, so we would expect to see more local investors. If it is a conventional longer dated bond, like the Saudi did, then the investor base will likely be skewed to Europe, Asia and the US, pension funds in particular,” the banker concluded.
But, if the Saudi’s US$17.5bn bond with a nearly US$67bn orderbook is anything to go by, demand in Kuwait and other GCC states’ debt is likely to remain robust in 2017.