(MENAFN- Kuwait News Agency (KUNA)) KUWAIT, July 18 (KUNA) -- GCC debt markets saw little volatility in yields in 2Q16, even as issuance picked up on the back of healthy sovereign activity supported by stable oil prices, a dovish Fed, and limited global volatility.
National Bank of Kuwait (NBK) said in its report on Monday that investor confidence in the region remains fragile as concerns over fiscal sustainability and tightening domestic liquidity remain.
In a bid to ease pressures on domestic liquidity, most recent sovereign issuance has been international; central banks have also eased liquidity regulations. Nonetheless, liquidity strains persisted, pushing regional banks towards debt and interbank markets for funding, adding further upward pressure on interbank rates. Appetite for GCC debt is expected to remain healthy,though it may be dampened by external risk factors.
Yields have benefited from the relative stability in global oil markets and a dovish Fed. GCC yields saw little volatility in 2Q16 and continued to steadily trend downwards, as oil prices maintained healthy levels and the Fed rate hike was postponed to the second half of 2016.
Yields also seemed to be little affected by the global fallout that followed the Brexit vote. However, GCC spreads to US treasuries have widened as investors fled to safety. Five to six year paper for Dubai, Abu Dhabi, and Qatar finished the quarter down 21 to 23 basis points, settling at 3.33%, 1.90%, and 2.37%, respectively.
Despite recovering oil prices, CDS rates were up in 2Q16 for most GCC sovereigns following persistent speculation over fiscal sustainability and tightening liquidity. A slew of rating and outlook adjustments, to the downside for most, prompted investor caution. Successfully implementing fiscal reforms and tightening banking liquidity emerged as the main concerns.
Saudi Arabia was the most affected, seeing its credit default swaps (CDS) rate jump by 26 basis points in 2Q16, eroding any confidence gained in the past six months. Meanwhile, the United Arab Emirates appeared to emerge as a regional safe haven. Dubai CDS rates dropped 31 basis points to just under 200 swap points for the first time in almost a year, while Abu Dhabi's swap rates, the lowest amongst its peers, were mostly flat on the quarter.
GCC debt issuance was strong in 1H16, boosted by sovereign issuance. Gross issuance totaled USD 55 billion during the first half of 2016, with USD 36 billion added in 2Q16 alone. This compares to USD74 billion issued during the whole of 2015. The stock of outstanding bonds in the region grew by 24% in 2Q16, its fastest pace in five years, to stand at USD 335 billion.
With public sector financing needs expected to top USD 120 billion in 2016, GCC sovereigns continued to tap debt markets for funding, leading the issuance of new debt in 2Q16. Sovereigns accounted for close to 75% of gross issuance during the quarter, issuing USD 27 billion.
With liquidity concerns at the forefront, some governments avoided domestic currency issues in favor of international offerings.
Appetite for the debt was strong, with Abu Dhabi, Qatar, and Oman, comfortably selling USD 16.5 billion worth of international bonds. Saudi is looking to capitalize on this momentum and is seeking to offer international investors USD 10 billion in foreign currency bonds, if not more. (end) mfs.nfm