News Column

New UAE, Oman bond rules to boost GCC debt market

February 1, 2014

Move to provide commercial banks a new source of funding. New bond rules and initiatives by the UAE and Oman are expected to give a further impetus to GCC debt securities market growth in 2014, market analysts said. The UAE , which remains in the lead with the largest portfolio of outstanding debt securities followed by Qatar , issued last month new rules for the issuance and trading of covered bonds. The move, a major step towards developing UAE's debt market, seeks to provide commercial banks a new source of funding. Covered bonds, which are backed by cash flows from mortgages or public sector loans, are considered relatively safe because investors have a preferential claim on the assets in the event of a default. The Securities and Commodities Authority of the UAE has set conditions for banks and other companies to obtain licences allowing them to issue covered bonds. Recently, the Capital Market Authority of Oman issued draft sukuk regulations to promote the Islamic debt market. On top of this, the Oman government also plans to float $520 million worth of sovereign sukuk in the domestic market. In 2013, growth in stock of outstanding debt securities in the GCC remained solid driven by low rates and rapid economic growth, National Bank of Kuwait said. Issuance growth by the private sector was particularly strong, led by non-financial corporates in Saudi Arabia. Banks too continued to be a large source of new debt issues spurred on by regulatory changes. "New rules allowing covered bonds in the UAE and sukuk debt in Oman could see further strength in debt securities growth in 2014," NBK said. According to IFR, a Thomson Reuters unit, bond issuance from the Gulf is set to surge in 2014 on the back of heavy infrastructure spending and refinancing needs even as Abu Dhabi sovereign is expected to return to the market after an absence of nearly five years. Morgan Stanley has predicted that total bond and sukuk issuance for 2014 would be between $40 and $45 billion . If sukuks represent the same proportion of total issuance in 2014 as it did in 2012, GCC Sukuks would account for between $27 and $30 billion , a growth of between six and 18 per cent over 2013 issuance level. In 2013, outstanding bonds and sukuk issued by GCC entities reached $257 billion , up 16.4 per cent from a year ago, in line with performance over the past few years. "The UAE remains in the lead with the largest portfolio of outstanding debt securities followed by Qatar . The latter could lose its second place position in 2014 with $19.4 billion worth of public sector debt due to mature this year," said NBK. The bank noted that the issuance of new bonds and sukuk was flat in 2013 at $56.4 billion . "Bearish market sentiment in the wake of mid-year speculation that the Federal Reserve might begin to taper its bond buying program may have dampened issuance somewhat. Despite this, 2013 saw strong activity from the private sector, with the non-financial sector in Saudi Arabia accounting for most of the growth." Issuance by public sectors and banks was lower, NBK pointed out in a report. "Despite lower issuance by the region's banks in 2013, the sector continued to see rapid growth in outstanding debt. Issuance topped $15 billion , with the stock of outstanding public sector debt reaching $65 billion by the end of the year. "The sector has been increasingly looking at debt markets for funding in response to increased regulations requiring liabilities with longer maturities. Also, some banks started to issue bonds that meet new capital adequacy rules," NBK said. NBK observed that the average maturity of outstanding GCC bonds remained steady at 5.8 years. Regional interest rates moved higher in 2013, but are down from levels seen around the middle of the year. Sovereign bonds that mature in 6-7 years for Dubai , Qatar , and Abu Dhabi have seen their yields rise by 50 to 60 basis points from a year ago, to settle at 4.46 per cent, 2.72 per cent, and 2.42 per cent, respectively.

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Source: Khaleej Times (United Arab Emirates)

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