International institutional investors have generally overlooked investment opportunities in the MENA (Middle East and North Africa) region, especially in the fixed-income market, due to their lack of understanding of the area and its asset classes. However, a senior executive at Lombard Odier has stated that the region’s economic potential justifies reconsidering the approach.
Chief investment officer for one of the largest private financial institutions in Switzerland, Nannette Hechler-Fayd’herbe, told The National, “It’s my view that they [MENA asset classes] are still underrepresented in most international portfolios, and this is certainly something to take a look at, especially on the credit side, as here, the economy is at a point where a lot of investments will be made.”
Outlook For Debt Issuance
Sharia-compliant bonds will make up roughly 40% of the USD 1 trillion in outstanding debt that Fitch Ratings anticipates the GCC debt capital market issuances to reach this year and next.
The rating agency anticipates lower oil prices, which will average roughly USD 80 per barrel in 2024 and USD 75 in 2025, as the main driver of government issuances.
The United States Federal Reserve’s anticipated interest rate decrease will increase issuances even more as funding costs come down.
The GCC debt market had a 7% increase in outstanding debt in the first quarter of 2024, reaching USD 940 billion. Saudi Arabia accounted for 43% of the total, while the UAE increased its contribution to 30%.
According to Fitch data, in the first three months of this year, GCC issuers raised a total of USD 48.1 billion, or about a third of all emerging-market dollar issuance (excluding China).
According to Franklin Templeton, the FTSE MENA Bond GCC Index declined 0.55% during the first quarter of 2024, following a pattern that saw global aggregate bond indexes record negative returns in US dollars.
The global money manager did, however, state that an increase in allocations to better-quality fixed-income instruments is still supported by its view.
As we go toward rate reductions in 2024, GCC bonds are a fantastic example, according to Mohieddine Kronfol, chief investment officer and head of MENA Fixed Income.
According to data from institutional investors that is currently accessible, Ms. Hechler-Fayd’herbe stated that institutional portfolios and several emerging market indices do not have a strong enough representation of the region or some of its giants.
“There is a need for a catch-up, starting with institutions, but this catch-up is much more obvious among average individual investors,” the speaker stated.
IPO Surge
In particular, the corporate sector in the six-member Gulf Cooperation Council (GCC) and sovereigns in the larger MENA region need funding to continue on their current growth trajectory.
This will result in more issuances in the debt and equity markets, according to Ms. Hechler-Fayd’herbe, who also oversees sustainability strategy and research for Europe, the Middle East, and Africa at the 227-year-old bank with USD 213 billion in client assets.
The last two years have seen strong performance in the GCC’s equity markets, thanks to both sustained economic expansion and a surge in private and state-owned businesses going public.
According to PwC’s quarterly IPO Watch report, listing activity in the MENA has continued this year, with 10 companies using the GCC equity markets alone to raise USD 1.2 billion in proceeds in the first quarter.
The world’s largest oil business, Aramco, saw Saudi Arabia begin a secondary share sale last week. The transaction has the potential to raise as much as 44.8 billion Saudi riyals, or $11.9 billion.
With a closing date of June 11, the government is selling 1.545 billion Saudi Aramco shares or 0.64% of the company’s outstanding shares.
The increase in initial public offerings (IPOs) and debt issuances, according to Ms. Hechler-Fayd’herbe, “will continue to [result in] a consistent flow [of deals] and this is going to [blend in] positively in a well-diversified foreign investment exposure.”
Nonetheless, “I would guess that the representation [now] is either non-existent or minimal” based on the discussions she claimed to have had with clients.
The MENA region’s economies, particularly those in the Gulf, have recovered well from the pandemic-induced downturn and have continued to grow rapidly ever since.
The governments of the Gulf Cooperation Council (GCC), which has almost one-third of the world’s proven oil reserves, are working to diversify their economies away from the sale of hydrocarbons.
The two biggest economies in the area, Saudi Arabia and the United Arab Emirates have opened up new investment sectors, enacted structural reforms, and are making significant investments in large-scale projects and infrastructure.
The enormous financing needs resulting from the various sectors’ large expenditure plans have increased activity in the debt capital markets as corporate, sovereign, and quasi-sovereign issuers swarm to raise money.
According to Fitch’s global head of Islamic finance, Bashar Al Natoor, “four out of six GCC sovereigns are investment-grade and all on stable outlook.”
As a result of budget deficits (3% of GDP in the 2024 fiscal year and 3.4% in the 2025 fiscal year) and issuers’ desire for finance diversification, Saudi Arabia hopes to expand its sukuk and debt markets.