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Kuwait among major sovereign bond issuers in 2017
March 25, 2017, 5:21 pm

Emerging governments and companies raised close to half-a-trillion dollars on global bond markets last year and early indications are that 2017 could see even more deals, with Gulf countries including Kuwait being among the biggest sellers of sovereign bonds.

In 2016, though it was Argentina that started big-ticket bond sales with its $16.5 billion sovereign deal in April 2016, it was the Gulf countries that really rallied global bond markets. The sale of US$9 billion bonds by Qatar in May, and Saudi Arabia's huge $17.5 billion bond sale in October, helped push total bond sales by governments in 2016 to a record $128.8 billion. Net sovereign issuance — taking into account maturities — stood at $101.9 billion, which was still more than double 2015 levels.

Analysts at JPMorgan Chase believe that in 2017, though net sales could fall to $68 billion, a little over half of last year’s sales, total government bond issuance could total $104.7 billion. While Argentina would likely return to the bond market in 2017 with a significant deal, it is the Gulf countries that are forecast to drive the bulk of 2017 sovereign debt issuance.

According to Bank of America Merrill Lynch's ‘Global Economic Monitor (GEM) Macro Monthly Report’ for February, Saudi Arabia, Argentina, Qatar and Kuwait are projected to be the largest gross and net debt issuers in 2017.

The report noted that these four issuers could account for 37 percent of the total sovereign gross issuance in 2017. The GEM study noted that among the four it expected Kuwait, with currently no external sovereign debt, to be the most attractive to investors. Kuwait is said to be in the near-announcement stage of a $10 billion bond, intended to finance the budget deficits that have resulted from falling oil revenues due to lower oil prices in recent years.

In 2016, Kuwait tabled its first budget deficit in over 16 years, with the country's Finance Minister Anas Al-Saleh admitting that budget expenditures would have to be curtailed in the wake of lower oil prices, which account for nearly 90 percent of the country’s revenue.

Minister Al-Saleh informed Parliament that the domestic market, as well as US-denominated bonds from international markets, would be approached to borrow money, and that both conventional and Sukuk issuances will be used to bridge the budget deficit of $15.3 billion. While the domestic market was expected to provide $6.6 billion, the minister said the rest would come from international debt markets.

Though Kuwait's financial fundamentals are strong, due to its huge oil reserves, low cost of exploiting them and small population, analysts believe that the country's reluctance to trim lavish subsidies to citizens and implement necessary economic reforms could see the country continue to post budget deficits in the coming years.

However, other analysts hold the view that with oil prices showing signs of recovery and some lawmakers opposed to issuing foreign debt, Kuwait could end up issuing a smaller debut bond in 2017. Some investors have also been expecting Kuwait to include a 30-year tranche in its issue, as Saudi Arabia and Oman did for their successful issues in recent months. But although Kuwait is preparing a draft law to allow maturities of up to 30 years, an existing law limits its borrowing to maturities of up to 10 years.

With indications pointing to Kuwait coming out with both five- and ten-year bonds in the coming months, investors say the country’s first public bond issue in the global market is likely to be priced between Abu Dhabi government debt and Qatar's. Abu Dhabi — long considered as the gold standard in the Gulf — has a five-year bond maturing in May 2021 that currently yields 2.45 percent, while its 10-year notes due in 2026 yielded 3.31 percent. Qatar’s 2021 bonds are at 2.69 percent and its 2026 bonds, at 3.51 percent.

Though Kuwait might need to pay a 'first issue premium' for its debut bond, placing it between Abu Dhabi and Qatar, the country's better financial fundamentals could see it trade in line with, or even slightly inside, Abu Dhabi. Moreover, Kuwait also has the advantage of being a sovereign, with less contingent liabilities than Abu Dhabi, which is only one part of the seven emirates that form United Arab Emirates and includes both highly leveraged places like Dubai, but also deficit-heavy places such as Sharjah.



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