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SWOT Analysis: GCC Credit Markets in 60 Seconds

Bonds & Loans examines the strengths, weaknesses, opportunities and threats across the GCC following a research trip to the region.

Oct 3, 2019 // 3:41PM

Strengths

  • Credit spreads across the region have tightened despite on-going oil price volatility
  • Falling interest rates globally are offering access to cheap funding for issuers and borrowers and market activity is expected to pick up as soon as Q4 2019
  • The JPM index inclusion has led to increased international investor appetite for GCC credit, particularly from long-term institutional investors
  • Bank consolidation across the GCC is strengthening regional banks’ liquidity positions
  • The GCC continues to be considered an attractive investment destination vs. other EMs

Weaknesses

  • Underlying GCC credit quality across sovereigns, GREs and corporates has deteriorated due to oil price volatility
  • The sukuk market is struggling to take-off because of a perception that conventional markets offer longer maturities and greater liquidity
  • Loan market activity has been slow so far in 2019, mainly driven by re-financings rather than new money deals
  • Local capital markets across the GCC are under-developed, driving issuers to increase USD leverage
  • Some infrastructure projects are slowing down or being put on hold
  • Progress on fiscal reform and economic diversification is slow and uneven across the region
  • GCC growth remains highly dependent on oil, meaning fiscal deficits and credit quality will remain highly dependent on oil price

Opportunities

  • A change in the way sponsors bid for projects is likely to be a catalyst for “underwrite-and-distribute” syndicated loan activity in 2020
  • Banks, ECAs and other lenders are lending to a broader spectrum of companies (corporates and SMEs) in response to intensifying competition
  • Regional issuers and borrowers are developing their ESG credentials in response to increasing investor demand for green and sustainable investments
  • Asian appetite for Middle East credits is generating a need for GCC issuers and private investors to learn how to work with partners from the Far East in order to capitalise on new investment opportunities
  • Credit rating agencies are receiving a record number of rating enquiries by unrated companies looking to take advantage of low interest rates in the capital markets
  • Asian issuers are investigating ways to attract GCC regional investors to buy their bonds
  • A low yield environment is driving investors to search for yield through new instruments and products such as leveraged sukuk, fixed maturity products, and Term Loan B structures
  • Following a year of subdued activity, private equity and M&A business is expected to pick-up, and deals will be financed either through debt or equity

Threats

  • Ongoing geopolitics are a threat to global and regional markets
  • Regional investors and analysts predict a slowdown in regional GDP growth caused by the current global macro and political environment
  • GCC credit spreads should widen due to oil price volatility impacting underlying credit quality, and a diminishing effect of the JPMorgan EM Bond index inclusion on liquidity – the question is when?
  • Transitioning away from LIBOR could impact bank and borrower exposures through both fixed and floating rate instruments
Middle East Currencies Energy Islamic Finance Policy & Government Projects & Infrastructure Ratings Sustainable Finance Economics and Markets Commodities Macro

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Bonds & Loans
November / December 2019

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