Issuance of Bonds and Sukuk by GCC and Pakistan in 2017-2018 – Learning lessons for the whole region

Primary issuance of bonds and Sukuk by GCC entities, including Central Banks Local Issuances, GCC Sovereign and Corporate Issuances, totaled $174.17 billion in 2017, a 3.96 per cent increase from the total amount raised in 2016.

Central Bank Local Issuances are Fixed Income securities issued by GCC central banks in local currencies and with short maturities for the purpose of regulating levels of domestic liquidity. During 2017, a total of $69.90 billion was raised by the GCC central banks, namely by the Central Bank of Kuwait, Bahrain, Qatar, and Oman. (The only publically available information is from the Central Bank of Bahrain, the Central Bank of Kuwait, the Central Bank of Oman, and the Central Bank of Qatar). The Central Bank of Kuwait raised the highest amount with KWD 10.93 billion ($36.179 billion), representing 51.76 per cent of the total amount raised by CBLIs through 70 issuances, followed by the Central Bank of Bahrain, which raised a total of BHD5.39 billion ($14.33 billion).

The GCC Bonds and Sukuk market is composed of bonds and Sukuk issued by GCC Sovereign, corporate entities and financial institutions, for financing purposes in local and foreign currencies. A total of $104.26 billion was raised in the GCC bonds market in 2017, a growth of 1.78 per cent from $102.44 billion raised in 2016.

On a quarterly basis, the fourth quarter of 2017 recorded the highest value of issuance with $39.44 billion raised through 59 issuances while the third quarter was the most subdued as $17.87 billion was raised through 45 issuances.

Saudi Arabia was the leading issuer in 2017, raising $41.60 billion through 20 issues and representing 39.9 per cent of the total value raised by the GCC issuers during the year.
The UAE-based issuers raised $32.61 billion during 2017, up by 35 per cent as compared to $24.3 billion raised in 2016 and representing 31.3 per cent of the total market. Kuwait entities represented 10.4 per cent of the total issuances, raising $10.83 billion as compared to $4.52 billion raised in 2016. Omani issues represented 7.8 per cent of the total value of issuances, raising $8.12 billion through 8 issues. Amidst the regional crisis, Qatari entities raised $6.18 billion from 62 issues; however the primary issuances dropped by 67.8 per cent compared to $19.22 billion raised in 2016. Bahraini entities represented 4.7 per cent of the total issuances, raising $4.90 billion through 6 issues.

Sovereign issues continued to dominate the GCC bonds and Sukuk market in 2017 contributing 62.6 per cent to the overall market with a total value of $65.28 billion as compared to $65.82 billion in 2016. Total value raised by corporate entities in 2017 increased by 6.46 per cent, to $38.98 billion in 2017 from $36.61 billion in 2016. Saudi Arabia Government raised a total of $37.28 billion out of which SAR58.45 billion ($15.78 billion) through domestic bonds and $21.5 billion through US dollar denominated Bonds and Sukuk. The year was also instrumental for the Kuwaiti debt market as the Kuwait Government issued its debut Euro-dollar bonds in March raising $3.5 billion through five-year bonds at a coupon of 2.75 per cent and $4.5 billion through ten-year bonds at a coupon of 3.75 per cent. Abu Dhabi, Oman and Bahrain governments raised $10 billion, $7 billion and $ 3 billion respectively. Qatar was the only GCC sovereign entity not tapping the international bond markets in 2017.

Conventional issuances raised $81.42 billion, or 78.08 per cent of the total amount raised in GCC bonds and Sukuk market during 2017. Sukuk raised $22.85 billion, 81 per cent higher as compared to $12.63 raised in 2016 and represented a share of 21.91 per cent of the market in 2017.

Government sector accounted for the largest amount raised during the year, with $65.28 billion representing 62.6 per cent of the total amount raised as compared to $65.82 billion issued in 2016. The Financial sector followed with $22.29 billion (21.4 per cent of total market) raised through 227 issues.

Issuances with tenures of six to ten years raised the highest amount, $42.9 billion, through 35 issuances, representing 41.2 per cent of the total amount raised. However, maturities of five years or less increased to $39.79 billion representing 38.2 per cent of the market as compared to $11.93 billion in 2016 representing 11.4 per cent.

GCC bonds and Sukuk issuances during 2017 had issue sizes ranging from $0.65 million to $5 billion. Issuances with principle amounts greater than or equal to $1.0 billion raised the largest amount of $62.17 billion, representing 59.63 per cent of the total value.
US dollar denominated issuances lead the GCC Bonds and Sukuk market, raising $82.52 billion (79.14 per cent of the total amount raised) by 203 issuances. Followed by Saudi Riyal raising $18.78 billion (18.01 per cent of the total amount raised) through 13 issuances.

During 2017, a total value of 73.3 per cent of Sovereign and Corporate issuances, were rated by either one or more of the following rating agencies: Moody’s, Standard & Poor’s, Fitch, and Capital Intelligence out of which 87.9 per cent issuances had investable grade ratings.
During 2017, 73.3 per cent of the total issuances or 126 GCC Bonds and Sukuk issuances, with an aggregate value of $76.46 billion were listed on exchanges. Listing on international exchanges accounted for 99 per cent of the listed issues with an aggregate value of $75.56 billion.

As of 31 December 2017, the total amount outstanding of corporate and sovereign bonds and Sukuk issued by GCC entities was $425.68 billion. Government issuances made up the majority of the total amount outstanding with $203.39 billion, or 47.8 per cent of the total amount. Financial sector led the corporate sector with a total amount outstanding of $101.64 billion, or 23.9 per cent of the total amount.
Of the amount outstanding as of 31 December 2017, $164.21 billion, or 38.58 per cent were issued by Saudi Arabian entities. Bonds and Sukuk by Kuwaiti entities represented $19.67 billion, or 4.62 per cent of the total amount outstanding.

Comparing Pakistan it would once again tap international capital market to issue sukuk/bond within next couple of months to generate at least $1 billion or more to build the country’s foreign exchange reserves.
The process of issuance sukuk bond has started already. The government is eyeing to generate at least $1 billion or more from the issuance of sukuk bond . However, the exact amount would be decided after a response from the international market subsequent to road shows. Up till Dec 2017, Government has already issued 3 years Ijarah Sukuk in the domestic market to the amount of Rs 385 billion. From external sector it has raised $ 7.3 billion through Sukuk.

The Ministry of Finance had already sought permissions of the federal cabinet for borrowing from international capital market. The federal cabinet headed by Prime Minister Shahid Khaqan Abbasi deferred it till next meeting with a directive to present a comparative analysis of interest rate. The government’s plans to raise loans from the international market by issuing bonds would support the foreign exchange reserves, which are under pressure due to widening trade deficit.

Pakistan’s external sector is under pressure due to widening of current account deficit, which is eroding the foreign exchange reserves of the country. The reserves are sharply tumbled by over $4 billion in one year to $18.9 billion. The current account deficit had widened to $ 14.3 billion in the first six months of the current fiscal year, as higher imports growth offset the improvement in exports.
Topline Research, in its recent report, said that projected Current Account Deficit during FY18 to be in the range of $16.0-16.5 billion (5.0-5.5pc of GDP), up from $12.1 billion in FY17. “This will likely result in further depletion of forex reserves, which we expect to further fall by $3 billion in FY18 to $13 billion,” it stated.

The government, in the budget for the ongoing financial year 2017-18, had projected to generate $1 billion at least from issuing sukuk bond in the international market. Issuing bond could boost the declining foreign reserves of the country. Pakistan had successfully tapped international capital market four times since 2014.

Meanwhile, the country would repay $7.4 billion on external debt including $1.6 billion on interest payment during the current fiscal year. Similarly, the country would repay $4.263 billion in 2018-19, $7.07 billion in 2019-20 and $4.571 billion in 2020-21. The World Bank, in its recent report, noted that Pakistan’s external balance is particularly vulnerable given the persistent current account deficit, affecting the country’s reserve position. Improving the external balance hinges upon a revival in exports, a slowdown in imports, and stable remittance flows. In absence of any of these factors, the persistent current account deficit will put further pressure on already dwindling reserves.


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