The GCC debt capital markets staged a broad-based recovery in the second quarter of the year after a disappointing beginning to the year. The conventional bond market saw the aggregate value of primary issuances increase by 33% over the last quarter, while the number of issuances more than doubled, according to a report published by NCB Capital, a Saudi Arabia-based investment bank.
According to the report, the primary sukuk market also picked up, lead by sovereign issuances, and reached a total value of $3.4bn, a significant rise over the same period last year. However, against this positive backdrop, the markets face a period of uncertainty in the wake of the European debt crisis.
Sovereign sukuk issuance totaled $1.5bn during the quarter, whereas activity proved much more lackluster in the corporate sukuk space with the notable exception of a landmark issue by Saudi Electricity Company.
The near-term outlook for the GCC debt capital markets remains cloudy amidst an uncertain global economic environment and rising domestic inflationary pressures. The bank believes that GCC debt markets face a period of uncertainty due to mounting global economic risks in the wake of the European sovereign debt crisis and signs of renewed weakness in the US.
In the Gulf region, rising inflation threatens to push up yield expectations, thereby causing a number of issuers to postpone their plans. Nonetheless, the growing need for long-term financing coupled with low interest rates should continue to support the market, suggested the report.
Jarmo Kotilaine, chief economist of NCB Capital, said: “Government issuances emerged as a key market driver. Out of the eight GCC sukuk issued during the last quarter, seven were sovereign issues from Bahrain and Qatar. The progress made in restructuring troubled sukuk also boosted sentiment in the Shariah-compliant market segment.
“Even as global economic uncertainties will inevitably persist, the steady progress of corporate restructuring in the region has boosted confidence. Planned capital expenditure and infrastructure investments are likely to drive the GCC debt market in the coming quarters. At the same time, companies are showing signs of seeking even more short-term alternatives to bank finance, which is recovering only slowly.”