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Q1 2019: GCC capital market issuance should bounce back this year

GCC corporate and infrastructure capital market activity was slow in the first quarter of 2019, due to volatility in the global capital market.

However, issuance volumes are likely to pick up strongly in the remainder of the year, led by Saudi Aramco and Saudi Telecom The credit outlook for GCC corporates is broadly stable, underpinned by a calm macroeconomic outlook, stable sovereign ratings, supportive interest rates, rising oil prices, and support from owners The regional real estate markets remain under pressure, notably in Dubai, Qatar, and Saudi Arabia, because of oversupply and waning demand

(Report by S & P Global)

Despite strong interest in credit ratings from previously unrated GCC-based corporates in new industries such as consumer goods, health care, and education, uncertainty and volatility in the global capital market have kept issuance volumes low so far in 2019. Nevertheless, S&P Global Ratings expects volumes to pick up strongly in the remainder of the year.

Chart: S & P Global Ratings

The risks of a trade war between the U.S. and China, the U.K.'s departure from the EU, and a Chinese economic slowdown are some of the factors weighing on the global economy. Investors see a negative 10-year German Bund yield and an inverted U.S. Treasury yield curve as indicators of a slowing global economy. Following revised guidance by both the European Central Bank and the Federal Reserve (Fed), we now expect the Fed to hold its key rate steady this year, and raise it once in 2020.

We have seen visibly lower issuance by GCC corporates in the first months of the year. Total bond and sukuk issuance in the year-to-date is around $1.1 billion, and largely from two issuers–the Saudi food and beverage group Almarai Company, which came to the market with its debut $500 million five-year 5.95% sukuk, and a $600 million sukuk issued by Bahrain sovereign wealth fund Mumtalakat. This situation is likely to change in the coming days and months, with the likes of Saudi Aramco and Saudi Telecom lining up to tap the international capital markets. With average yields on GCC bonds and sukuk having falling in recent weeks to levels not seen since 2017, issuers see an opportunity to lock in lower rates on long-term borrowings.

Chart: S & P Global Ratings

The regional real estate markets, notably in Dubai, Qatar, and Saudi Arabia, remain under pressure due to a combination of continued oversupply and waning demand. We expect Dubai residential real estate prices to fall further in 2019, approaching levels last seen at the nadir of the 2009-2010 property crash, before a gradual stabilization in 2020, though without a meaningful recovery in 2021.

We continue to see political risk, energy and water subsidies, and tax reforms across the GCC as some of key near-term risks to the region's issuer credit ratings. The introduction of VAT took place in the United Arab Emirates (UAE) and Saudi Arabia in 2018, with the other GCC countries expected to follow suit in 2019-2021, at a time when cost-reflective electricity and water tariffs are being phased in across several GCC countries. Operating costs for many businesses have also been hit by increasingly demanding rules for the nationalization of the workforce, notably in Saudi Arabia.

Measures by the Organization of Petroleum Exporting Countries (OPEC) and Russia to cut production by a combined 1.2 million barrels per day from October levels, for six months from January 2019, and U.S. sanctions on Iran and Venezuela, have helped oil prices rise. (See "Brent Crude Price Assumption For 2019 And 2020 Raised To $60 Per Barrel," published March 19, 2019.)

This supports the ratings on our hydrocarbon-exporting GCC sovereigns. We have stable outlooks on all the rated GCC sovereigns. This in turn supports our issuer credit ratings, over half of which are on government-related entities (GREs), where a key rating driver is the creditworthiness of the related sovereign.

A notable number of cases of ownership-support measures during 2018 and 2019 have also helped underpin our issuer credit ratings. These include the recent potential capital increase announcement by Kuwaiti investment holding company Kuwait Projects Co. (Holding) K.S.C. and the liquidity support that Qatar-based property company Ezdan Holding Group Q.S.C. (Ezdan) received from its majority shareholder. We expect such support to continue in 2019.