Will GCC bond sales boost regional construction?

Analysts tell Paromita Dey that Saudi Arabia’s largest-ever bond sale, which generated $17.5bn, will have a long-term impact on construction in the kingdom

King Abdullah Financial District: Development of Saudi Arabia’s KAFD began in 2006, but the project has been plagued by delays.
King Abdullah Financial District: Development of Saudi Arabia’s KAFD began in 2006, but the project has been plagued by delays.

In an attempt to revitalise its economy and lessen its dependence on oil, Saudi Arabia has conducted a blockbuster sale of international bonds. The kingdom’s biggest ever bond sale, which took place on 19 October, 2016, generated $17.5bn (SAR65.63bn), and was four times over-subscribed.

The KSA government sold a range of dollar-denominated bonds: five-year securities at yields of 135 basis points; 10-year securities at yields of 165 basis points; and 30-year securities with yields of 210 basis points. The sale marks the latest step in Saudi Arabia’s efforts to move away from its oil-dependent economy and diversify its revenue streams.

According to a recent report by the International Monetary Fund (IMF), Saudi Arabia’s budget deficit is expected to shrink to 14% of its gross domestic product (GDP) this year, compared to 16% in 2015. However, the sustained low oil price will likely lead to continued deterioration of its fiscal balances, the IMF predicted, despite public spending cuts and diversification measures.

Saudi Arabia’s implementation of financial reforms, set out in Deputy Crown Prince Mohammad bin Salman Al Saud’s Vision 2030, will contribute towards the kingdom’s net international investment position (NIIP), which is expected to reach $1.3tn (SAR4.9tn) by 2030, according to economists. Saudi Arabia’s structural reforms will lead to non-oil current account inflows rising from $85bn in 2015 to $262bn by 2030.

Industry experts told Construction Week that the bond proceeds would be instrumental in building confidence in the kingdom’s government, which is looking to boost its real estate and construction sectors.

Craig Plumb, JLL’s head of research for the Middle East and North Africa (MENA) region, commented: “The bond sale is an indication that the Saudi government is actively pursuing its strategy of looking at alternative sources to finance its budget deficit. [This] forms part of the kingdom’s strategy to diversify its economy away from the oil sector.

“This, in turn, will improve the government’s ability to fund the ambitious real estate projects it wishes to complete over the next few years. These include [developments] such as King Abdullah Financial District (KAFD), King Abdullah Economic City (KAEC), infrastructure investments such as the [Haramain High Speed Rail project], the expansion of major airports, social infrastructure, and [initiatives] that address the continued shortage of affordable housing.”

Oil represents the main reason behind Saudi Arabia’s decision to hold a bond sale. The price of oil, which has fallen from its 2014 peak of more than $100 per barrel to just under $50 per barrel at present, has shaken the largest economy in the Middle East to its core. The decline has caused the KSA government to reduce public sector wages, cancel infrastructure projects, and announce the IPO of Saudi Aramco.

The latest bond sale is expected to set a benchmark for the kingdom, and pave the way for the assistance of contractors by generating additional construction work. At present, the government represents the primary client for construction outfits operating in Saudi Arabia.

David O’Hara, director and head of Cluttons Saudi Arabia, is confident that the sale will have a long-term impact on the country’s construction sector. He explained: “When [KSA] is issuing such bonds, it means that the international bond market is very confident about what Saudi Arabia is doing. The observers are seeing strength in the market, and this ensures a solid placement of the bond [at a] global level. I think [that this] was lacking before, when the government was entirely focussed on oil revenues.”

Although O’Hara warned that the sale would not result in more projects, he said that it would help to boost market liquidity and, in turn, facilitate the progress of existing projects.

“We won’t see new projects being built,” he elaborated. “Instead, the issuance of bonds was focussed on revitalising the economy. It’s a step-by-step process to make sure that there is liquidity in the market, which will hopefully go through to construction and real estate companies.”

In addition to Saudi Arabia’s bond sale, 2016 has seen other GCC member states conduct substantial debt issuance activities. In Q2 2016, Qatar sold $9bn (QAR32.77bn) of Eurobonds, the now second-largest in the GCC history. The country borrowed across three maturities, selling $3.5bn (QAR12.7bn) in five-year notes at 120 basis points, the same amount in 10-year bonds at 150 basis points, and $2bn (QAR7.3bn) of 30-year paper at a 210 basis-point spread. In an attempt to overhaul its economy to support infrastructure development for the 2022 FIFA World Cup, the world’s largest exporter of liquefied natural gas (LNG) has offered three domestic bond sales this year.

This was followed by Abu Dhabi, which conducted a $5bn (AED18.36bn) dual-tranche transaction for the first time in seven years in order to deal with the budget deficit inflicted by the oil price drop. According to Bloomberg, the UAE capital raised $2.5bn (AED9.2bn) from five-year notes that were priced at 85 basis points, and the same amount from 10-year bonds that were priced at 125 basis points.

Meanwhile, Oman, a non-OPEC member, held a $2.5bn (OMR960m) sale of five- and 10-year bonds. The Gulf nation sold $1bn (OMR380m) of five-year notes at a yield of 245 basis points and $1.5bn (OMR580m) of 10-year bonds at a spread of 320 basis points.

GCC governments have been supplementing the aforementioned bond sales by addressing funding shortfalls in their national spending programmes. Although still prone to fluctuations and external influences, it will be interesting to see if the slow upward trajectory in the price of oil will ease pressure on regional budgets, and whether this will – in turn – generate the liquidity required to fund future infrastructure projects.

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