Where Did The Money Go?

The first quarter of this year came as rude awakening to all those, including myself, who had been looking forward to the steady consolidation and intensification of the economic recovery in the GCC region. The series of events that began in Tunisia ultimately brought tanks to the streets of Bahrain and substantially tested market sentiment during much of the opening three months of the year.

Not surprisingly, the positive progress of the regional financial markets was abruptly reversed. Even as relative normalisation of the regional political situation, along with the significant boost to government spending in most regional economies, should help boost confidence, the much awaited normalisation will likely now prove far slower in coming.

The stalling of the recovery is particularly pronounced in the area of bank credit which has been effectively treading water during much of the crisis, leaving the double-digit growth rates of yesteryear a fond memory. In practice, the trends in regional bank credit are looking increasingly dichotomous, with modest – albeit increasingly consistent – positive progress in Qatar, Saudi Arabia, and Oman. The annual rate of aggregate credit growth in Qatar during the December-February quarter was 14.1 per cent, the only regional economy to see double-digit growth. However, private sector credit expanded by a much lower 6.6 per cent, something that has caused the authorities to cut rates and boost liquidity. Saudi bank credit during Q1 rose by an annualized 5.6 per cent, now finally led by the private sector. Oman saw an 8.2 per cent annual increase in the three months to February.

By contrast, lending in other regional economies is flat or even declining. In the UAE, overall bank credit in 4Q10 was only 1.4 per cent ahead of the corresponding period a year earlier. Private sector credit actually declined by 1.9 per cent. In Kuwait, bank credit rose by a mere 0.4 per cent between 1Q10 and 1Q11. Bahrain saw an actual 0.5 per cent annualised contraction in the three months to February, a picture of relative stagnation that already predated the political crisis.

The situation in the capital markets hardly inspires greater confidence. Equity issuance has been highly sensitive to international and regional stress points during the crisis with various mandatory (required by regulations) and government-sponsored issues constituting the main element of continuity. The extraordinary risk aversion of issuers in the face of exceptional market volatility resulted in only one new issue during the quarter. This was the first time in two years that Saudi Arabia saw no new IPOs.

The Insurance House IPO on the Abu Dhabi exchange raised a total of Dh66m ($17.9m). However, reflecting market fragility, the March offering only met the threshold level with hours to spare after two weeks of subscriptions. The issue was open exclusively to UAE nationals who were required to subscribe to a minimum of 25,000 shares each. The company is expected to begin operations in May. Arabtech tapped the market with a secondary issue.

The bond and sukuk markets – reflecting their growing maturing but also the significant regional restructuring needs – experienced greater continuity. Combined conventional and Shariah-compliant issuance by GCC names reached $20.0bn, up marginally from $19.5bn in 4Q10. However, this seeming resilience was critically due to one issuer: Qatar Central Bank on 17 January placed Qar50bn ($13.7bn) worth of bonds and sukuk. These securities have a three-year tenor and a coupon of 5 per cent. Sold to domestic banks for the purpose of mopping up excess liquidity, they represent a remarkable 68.5 per cent of the total regional issuance during the quarter. Removing them from the totals reveals a market that was significantly disrupted by the turmoil.

The conventional market segment saw a mere five issuers tap the market, with regional governments notable through their absence. Overall, conventional issuance totaled $9.4bn, of which Qatar Central Bank account for $4.6bn. This was sharply down on the total conventional issuance of $17.1bn in Q4 but an improvement on the $5.0bn seen in 1Q10. By contrast, the Shariah-compliant market segment in fact posted one of its best quarters in recent years, both globally and in the GCC. There were a total of 122 issues worldwide during the quarter. GCC issues numbered 11, up from 10 in 4Q10 and only one in 1Q10. In value terms, global sukuk issuance attained $24.8bn, of which GCC issuers made up $10.5bn. Overall global issuance during the quarter compared to $16.8bn in 4Q10 and $4.4bn in 1Q10. The rebound was particularly pronounced in the Gulf with a more than three-fold on the 4Q10 issuance of $2.3bn and a 20-fold leap on the $0.5bn seen in 1Q10. Again, however, Qatar Central Bank accounted for most of the new issuance.

Hammered by caution and risk, where do the GCC markets stand? There are signs of confidence returning as the political situation stabilises and the increased government funding begins to trickle through. The pipeline of IPO, bond, and sukuk issues is sizeable and likely to become more active fairly quickly as the market conditions improve, something that is already happening. Encouragingly, regional quality issues remain generally popular. Confidence has been further boosted by more positive perceptions of the financial health of ‘Dubai Inc.’ The Dubai World deal in March and the upgrading of DP World to investment grade have boosted confidence and brought down yields.

While the market clearly remains sensitive to external shocks and regional instability, the potential for relatively swift normalisation is considerable. The positive trends foreseen last year might yet materialise. However, the delay of a quarter or so will make this a more lackluster year and one where the public sector will likely play a greater role as a source of capital than might have been expected or hoped.

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