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Analysts positive about Gulf debt

More than $76bn of Gulf bond and sukuk debt is expected to mature by 2014, according to Kuwait Financial Centre (Markaz) research.

Around $20.6bn of sukuk and bond is expected to mature this year, $14bn in 2013 and a massive $41.4bn in 2014, according to the Kuwait-based investment bank.

In total, there is around $205.6bn of outstanding debt and sukuk in the region. “Corporate issuances make up the majority of the total amount outstanding with $138.3bn, or 67.2 per cent of the total amount outstanding,” according to Markaz. “Sovereign issuances amount to $67.4bn or 32.8 per cent of the total amount outstanding.”

UAE entities have issued a little more than half of the debt outstanding at $106.4bn or 51.8 per cent of the total amount.

The country’s high debt is somewhat of an overhang on otherwise excellent economic prospects. Abu Dhabi’s formidable fiscal cushion and the country’s overall standing as a regional financial, tourism and business hub with excellent infrastructure has given investors confidence.

However, Dubai’s recent debt issues remain fresh in the mind of its global financial institutions. CMA Datavision, which tracks sovereign credit, estimates Dubai was the 21st most likely sovereign state to default, which is a marked improvement from last year’s ranking when the emirate was perceived to be the world’s 14th most likely state to default.

Meanwhile, investors have made a major distinction between the two main emirates, as Abu Dhabi debt is considered to be among the safest in the world, according to CMA.

Still, the International Monetary Fund (IMF) believes that the country could face “medium risk” if global credit conditions deteriorate.

However, it’s seen that there is “little reason to panic”.

Abu Dhabi has embarked on a fiscal consolidation, while Dubai is expected to bring its fiscal accounts to balance by 2014, as most of the major infrastructure projects would have been completed, notes the IMF.

Meanwhile, the Gulf states continue to pile on debt to match their rising infrastructure spending, although they are cushioned by massive fiscal surpluses.

From $19.6bn of bonds issued in 2003, Gulf states have regularly issued well over $50bn each year from 2009 onwards.

Gulf sovereigns and entities raised $37.6bn in the first half of 2012, which is 18.7 per cent lower than the debt issued in the first half of 2011.

“The GCC bonds market, composed of sovereign and corporate bonds and sukuk issuances denominated in local and foreign currencies, witnessed a notable increase in the number of issuance from 26 to 88 issuances during H1 2012, accompanied by an increase in the value of total issuance from $15.4bn to $23.7bn, a 54.0 per cent increase compared to the total value issued during H1 2011,” Markaz said in the report.

Given the region’s fiscal cushion and rising infrastructure needs, few analysts are concerned about Gulf debt. High oil prices continue to support the economy and allow the GCC states to keep funding their investment programme to meet the demands of a rising population.

However, external factors could derail the situation. “Volatility in oil prices, to a lesser extent a retrenchment of European banks and a potential closure of the Strait of Hormuz pose the greatest risks to the credit quality of GCC corporates,” notes Moody’s. “However, we currently see no indication that these risks are likely to materialise over the next six to 12 months.”

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