The forward momentum was particularly evident in bank lending and the sukuk markets. By contrast, a secondary market recovery in the equity has to date not translated into a meaningful rebound for IPOs.
The encouraging trends are to a significant extent underpinned by the strong progress of the regional economies which have benefited from a transition to a more inclusive growth paradigm involving increased government spending as well as positive progress in the oil price and production levels, which have helped allay fiscal sustainability concerns, said the report.
Structural weaknesses associated with housing market corrections and leverage concerns, most notably in the UAE, have become less of an issue as markets have bottomed out and major refinancing operations have concluded successful. The probability of significant new disruptions is now seen as fairly low, said the quarterly Report,
But the market rebound has also benefited from potentially more ephemeral factors, it added.
According to Chief Economist Jarmo T. Kotilaine of the National Commercial Bank (NCB), markets the world over have been marked by reduced risk aversion, partly because of some stronger economic data from the US, but also thanks to the latest European rescue package for Greece which has significantly reduced the probably of near-term discontinuities. "But the global backdrop remains fragile. The structural challenges facing the Western economies have not been meaningfully overcome and the ability of the EU to convince the markets that Greece is a special case remains in considerable doubt," he says.
The GCC financial markets have repeatedly shown themselves to be sensitive to external disruptions. Renewed trouble in the euro zone would trigger oil demand erosion concerns while the cost of funding would prompt issuers to delay their plans to go to the market. Consequently, the baseline scenario for the regional financial markets remains one of a continued tug-of-war between the generally benign regional picture and exogenous shocks. We are likely to continue to experience bouts of volatility; even if is around a generally positive trend.
Perhaps the most encouraging aspect of the recent developments in GCC financial markets has been the steady increase in bank lending, although country-specific factors still play an important differentiating role. In particular Kuwait and the UAE are struggling to develop traction, the former because of politically induced delays in project spending, the latter due to low deposit growth and tighter regulations. Elsewhere, however, the annual pace of credit growth is firmly in the double digits.
Kotilaine says: "The economic outlook is favorable and the banking sector solid, typically with ample liquidity to mobilize in the market, especially now that banks have by and large dealt with the non-performing loans produced by the downturn. Lending should further benefit from the low interest rate stance produced by the dollar pegs, although external risk factors still possess the potential for disruptions." Saudi Arabia saw overall lending during the three months to February average 16.4 percent more than the same period a year earlier. This compared to only 1.6 percent YoY growth in the UAE as of December.
A growing momentum in the sukuk space has been the other salient positive development in recent months. GCC issuance of $8.6 billion marked a sharp rebound over the $3.3 billion seen in Q4 2011, although it fell slightly short of the $10.7 billion figure recorded a year earlier in Q1 2011. The regional issues benefited from very strong demand as indicated by high oversubscription rates, highlighting the predominance of blue chip names. The strong quarter was particularly positive for Saudi Arabia, which now emerged as the largest regional sukuk issuer, shaking the historic dominance of the UAE. In spite of the growing positive momentum, the GCC is still lagging fairly far behind Malaysia in overall issuance with the latter routinely making up some three-quarters of the global total.
The quarter saw important landmark developments, most notably the first ever sovereign-guaranteed sukuk from Saudi Arabia – an eagerly anticipated SR15 billion ($4 billion) 10-year issue by the General Authority of Civil Aviation for Jeddah’s new King Abdulaziz International Airport. This was the largest single-tranche sukuk ever issued and 3.5 times oversubscribed the relatively low 2.5 percent profit rate notwithstanding. SAMA has approved the issue for repo arrangements with zero risk for capital adequacy calculations. Also Saudi Electricity Company issued its first-ever global sukuk – a $1.75 billion issue which attracted subscriptions of more than $17.5 billion.
In another welcome development, some new corporate issuers turned to the market, most notably the Saudi dairy producer Almarai that raised SR1 billion ($266.6 million) and the UAE mall developer Majid Al-Futtaim with a $400 million offering. Other similar names are expected to follow.
The conventional bond space also had a good quarter after an exceptionally volatile 2011. Overall, primary market activity roughly halved in value from Q4 2011. Total issuance in Q1 reached $5.9 billion and involved eight corporate names. This compares to aggregate issuance of $11.9 billion in Q4 2011 (issues with tenors in excess of a year) and $9.4 billion a year earlier in Q1 2011.
Issuance activity is clearly strongly linked to the refinancing and expansion needs of especially financial sector companies but it remains sensitive to the broader market environment. Q1 offered a window of opportunity but new potential challenges loom, especially due to the heavy refinancing burden in Dubai which has as much as $15 billion of debt maturing this year.
In general, the markets now tend to favor sukuk over bonds with yields at historic record lows. Low credit default swaps reflect the improved confidence with the most market improvement in Dubai and the greatest deterioration in Bahrain.
The regional equity markets have rebounded impressively with Q1 marked by consolidation of the equity market rally that began to take shape the in the closing months of last year. Saudi Arabia and Dubai led the way with gains in excess of 20 percent during the quarter. Elsewhere in the region, however the gains remained in the single digits or altogether absent. IPO activity lagged far behind the positive secondary market momentum, however. The region saw a total of only two new offerings during the quarter, both of them in Saudi Arabia. The total value of the Q1 IPOs was a modest $78.4 million, which was significantly down on the already modest total of three listings worth $212.2 million. By contrast, Q1 2011 saw only one offering worth $17.9 million.
With the exception of government spending, alternative sources of capital remain in relatively limited supply, although there are signs of increased interest and activity in the private equity space, albeit from a low base. Syndicated loans, by contrast, are facing growing structural challenges as the once dominant European banks retreat due to their regulatory pressures and recapitalization needs. Q1 2012 saw a total of $11.2 billion worth of loan syndications in the GCC. This compared to $39.1 billion in Q4 2011 and $83 billion in Q1 2011.
