Flurry of GCC bond issues amid heightened geopolitical tensions – are investors downplaying risk?

Rachna Uppal | Senior Analyst Business & Finance, GCC | r.uppal@castlereagh.net
  • Attacks on key Saudi Arabian oil facilities on Sept 14 and the subsequent risk of a regional military confrontation seem to have had little impact on investor appetite for Gulf debt. Despite bond prices spiking as a knee-jerk reaction to the strikes on the Abqaiq and Khurais oil assets, sentiment was swift to recover.
  • Issuance has unsurprisingly been led by sovereigns, with Abu Dhabi and Bahrain both taking advantage of relatively favourable market conditions. The Abu Dhabi government sold $10bn in three tranches of varying maturities while the Kingdom of Bahrain raised $2bln. Dubai government-linked entity DP World also successfully tapped global markets, despite heightened uncertainty for ports operators in the wake of tanker attacks in the Strait of Hormuz. The Abu Dhabi National Energy Company has sold $500m in a 30-year bond. All issues were oversubscribed.
  • The resilience of GCC bond issues under current circumstances can be attributed to a mix of global and regional factors, namely, a combination of the need to raise financing to fund economic growth and refinance existing debt, and investor demand for yield in a globally low-yield environment.



The Risk is Real:

While there remains a relatively low risk of default on sovereign and GRE bond issues from the Gulf – government support is a major factor driving the strong credit ratings of GCC issuers – the worry now is that investors are not adequately pricing in premiums stemming from increased geopolitical risk.

Market volatility in the days following the strikes on Saudi oil assets subsided to more “normal” levels within a matter of days, with oil prices retreating to pre-attack levels, and regional bonds and equities recovering from the initial sell-off.

Yet, further attacks on key national strategic assets by Iran-assisted groups active in the region is a very real scenario. And although the risk of a direct military confrontation between Iran and Gulf states remains low for the time being, with little appetite for another Middle East war from the US, a small misstep on either side could lead to much more damaging consequences.

While investors appear to be downplaying geopolitical tensions, global macroeconomic conditions are less easy to ignore. Near-daily negative headlines in the long-running US-China trade disputes, sluggish oil demand, increased shipping rates, and low global GDP growth forecasts continue to weigh on oil prices and regional economies. Further, with billions of dollars in debt and loan maturities coming up in the next five years, GCC governments and entities will need to refinance. Amid low growth, reduced oil revenues, a slowdown in retail and real estate, and hefty public spending targets, is the next big regional debt crisis far off?

While higher risk premiums may deter regional issuers from tapping markets as they will have to pay a higher coupon to investors as a result, a reassessment of risk associated with investing in Gulf bonds is probably necessary.