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
