EMTA Special Seminar on the MENA/GCC Markets (London) - Jan. 31

The Royal Institution of Great Britain
21 Albemarle Street
London W1S 4BS 

Topics to include:

How will the new US administration, Fed hikes and strong dollar affect Middle East economies?
What is the outlook for oil pricing?  Will US production reverse gains from the recent OPEC deal?
Will MENA supply continue, and what are investor appetites?
Do current spreads reflect downside risks?
Do Turkey and MENA oil importers offer better investment opportunities?
Which countries are vulnerable to credit downgrades?
How do investors view reform movement in Saudi Arabia?
And much more. 

3:15 p.m. Registration  

3:30 p.m. Keynote Address
"Developing the Local Bond Markets in the GCC"
Michael Grifferty
President, Gulf Bond & Sukuk Association 

4:00 p.m. Panel Discussion
Current Prospects for the MENA/GCC Bond Markets
Alia Moubayed (International Institute for Strategic Studies)
Marcel Kfoury (Bluecrest Capital)
Tim Gill (Fidelity)
Christopher Watson (Finisterre Capital)
Lupin Rahman (PIMCO)  

5:00 p.m. Cocktail Reception 

Registration fee for EMTA members: US$50 / US$695 for Non-Members. 

Development of Local GCC Markets Outlined at EMTA Forum in London

Eight years after it began holding events focusing on the Middle East in Dubai, EMTA held its first Seminar on the MENA/GCC region in London on January 31, 2017. The event was held in partnership with the Gulf Bond and Sukuk Association (GBSA), with which EMTA signed a Memorandum of Understanding in 2010 to jointly promote each other’s EM market development efforts. The Seminar sold out all of its 125 seats, and was sponsored by MarketAxess.

The GBSA’s President Michael Grifferty delivered a keynote address, reviewing the development of local bond markets in the GCC states. “Developing the local market was a good idea when oil traded at over $100, but now minds are much more focused,” he emphasized. The access to market financing to close budget deficits resulting from lower oil sales might prove more attractive than other means of narrowing shortfalls, and there was the potential for large new sovereign debt issues.

Grifferty noted that when Kuwait issues debt, as expected, all GCC sovereigns will have tapped the Eurobond markets, with large deals led by Saudi Arabia’s record-breaking $17.5 billion issue. Debt to GDP levels have remained modest, but are likely to build as Gulf States return to the markets following their recent taps.

Turning to the local markets, Grifferty described them as “thin, illiquid and retail-dominated.” Corporate governance and investor relations have improved, “but still have a long way to go.” Local debt markets remained the “poor cousin” of the region’s equity markets, he added.

Part of the GBSA’s initial work was to champion the concept of local debt markets as a resource for corporate and project finance, but Grifferty believed that this had been achieved, and regional authorities now recognized their benefits. Going forward, several fundamental goals remained, including: (1) there must be a legal framework for sovereign borrowings, and a definition of who is the obligor; (2) debt management offices must be built up “from scratch,” and must develop explicit debt management strategies; (3) the markets must be professionalized, such as adopting a sale by auction approach; and (4) the markets must be accessible to non-residents, and must be T+2 to accommodate international participants. He added that he expected the Saudi and Kuwaiti local markets to “take shape” in 2017.

Once sovereign issues anchor the local markets, Grifferty saw a need, and opportunity, for corporates to tap local markets as well. Corporates have eschewed local debt markets due to a perception--often true--that bank financing is quicker and cheaper, as they don’t require ratings or disclosure preparation. Work was needed to improve the attractiveness of market financing for corporates, including expedited approval of new issuance applications, the adoption of shelf registrations and exempt offerings, and an acceptance of the concept of book-building rather than the practice of declaring an interest rate in newspapers a week prior to issuance. Furthermore, Grifferty also saw an opportunity to promote the concept of securitization, which he described as infrequent due to documentation requirements and lack of familiarity with the product.

In addition to changes needed on the “supply” side, Grifferty also discussed the need for Gulf State local markets to develop the investor base, with—in addition to allowing foreign investors a need to attract and develop the local asset management, insurance and pension businesses. Responding to a question, he suggested that local markets might achieve a degree of depth and liquidity within two to three years.

Finally, Grifferty summarized that, while they were still in their nascent stages, GCC local markets were poised to help transform the region to one less reliant on oil prices.

The event also included a panel session chaired by Alia Moubayed (International Institute for Strategic Studies). Moubayed set the stage, discussing the “tectonic changes” in the international economic and political environment, such as Brexit, the election of US President Trump, threatened trade wars, and the surprise OPEC deal. In addition, she noted the slowdown in domestic growth in many of the MENA states. She asked speakers to first opine on the international economic outlook to give context to the discussion.

“Obviously, the US FOMC has adopted a more hawkish tone, suggesting three hikes in 2017,” stated Lupin Rahman (PIMCO). She observed that her firm’s call of a more dovish 1 to 2 hikes was in line with market consensus. Rahman expected 10-15% dollar strengthening if the proposed Border Adjustment Tax is approved in the US. She acknowledged that her investment strategy was to reduce risk and move closer to benchmarks until there was further clarity on trade policy. Focusing on the MENA region, she espoused a “cautiously optimistic view, with some good signs, but questions remain on oil prices and some geopolitical concerns.”

Fidelity’s Tim Gill stated that, “my personal view is that the OPEC agreement is a real game changer; it is the one thing that [Gulf States] have a reasonable amount of control over.” While oil was unlikely to return to its highs, Gill saw oil trading up to $60 or $70 per barrel as a possibility. Gill saw US fiscal policy and rate hikes as still being up in the air, and believed that a “wait and see” posture was necessary.

Christopher Watson (Finisterre) countered that rather than being a significant “game changer,” the OPEC agreement merely expedited the market forces (“by six months”) that were already pushing oil higher. “The shale story is probably not over,” he cautioned.

Finally, Marcel Kfoury of Bluecrest ventured that Riyadh had miscalculated when it decided in 2014 to increase production in order to “kill shale.” Instead, US shale producers cut costs more than had been predicted, causing the new thinking by Saudi officials. Kfoury argued that Saudi Arabia has, perhaps, the greatest need for structural reforms, and oil at $55 or $60 would ease the burden on Saudi citizens of recent adjustments. “However, if oil goes to $40, I don’t think the Saudi people will take any more austerity; it breaks the social contract that exists,” he declared.

Moubayed followed up on the reform topic. “2016 was an unprecedented year for reform momentum, with debt management frameworks being adopted,” she stated. She asked panelists to discuss the credibility of measures taken to date, and to identify where progress had lagged.
Rahman noted that there had already been slippage in such efforts as energy reforms, while acknowledging that reducing budget deficits via cutting subsidies was not an easy task. Bahrain probably was the region’s laggard in its reforms; “others are making reasonable progress, but we will have to continue to access the situation.” Watson agreed on Bahrain, adding that Oman was also relatively “fragile,” and had comparatively fewer buffers.

Gill was blunt, referring to Bahrain as a “complete disaster economically, as a credit” and opining that fiscal adjustment is “not going to happen” in Kuwait. The Saudis may have taken the first step by finally recognizing that they had a problem. To achieve the county’s 2020 goals, oil would need to be in the $70-$75 range, so it behooved Saudi Arabia to continue to cut oil production unilaterally even if the OPEC accord was to collapse, he reasoned. The best hope for the country, in Kfoury’s view, was for reforms to benefit the next generation; “oil at $50 to $60 buys time for Saudi Arabia; at $40, Saudi Arabia is not viable.”

For now, Gill was willing to give the benefit of the doubt to Oman, which he said had “laid out a relatively reasonable plan.” Kfoury remained concerned about succession; “even if they have great plans, we have no idea if they will be enacted if the Sultan is no longer around.” He added that Omani spreads were likely lower than fundamentals dictated because of its inclusion in the EMBI.

The panel largely concurred that, unlike other regions, there was no natural buyer for GCC debt. “Its ‘cusp-y’, neither DM nor EM,” according to Rahman. Crossover investors could sell off their Gulf holdings if large amounts of supply continues and reforms stall; “but for 2017 momentum is likely to remain positive.” She ventured that perhaps $60 to $70 billion in GCC debt could be issued this year.

Watson declared that, if there was no natural buyer for GCC debt generally, Bahrain was even more of an orphan. “Middle Eastern accounts won’t buy it; it’s not in the EMBI; it’s too ‘cusp-y’ for Asian buyers, so it’s left to opportunistic buyers like us.”

Moubayed recalled that when oil was trading in the $20s last year, there was some chatter of Gulf pegs being broken, although few analysts considered it a serious risk even at oil’s recent lows. Gill affirmed, “It is spitting into the wind to bet against any GCC peg,” and stressed that Saudi Arabia and other Gulf States would come to the aid of Oman if need be.

The panel concluded with speakers discussing potential opportunities. Watson’s recommendation included Iraq for those who envisioned decreased hostilities, and the Kurdistan Regional Government.

“I’m fundamentally the most optimistic on Lebanon since early 2003,” declared Gill. “With a little political will, a lot can be achieved with the balance of payment issue.” He added that Lebanese debt had little correlation to other credits, so served also as a diversification play. Kfoury admitted his long-time bearish stance on Lebanon was changing. “They will have to come to the capital markets, and they could attract some external investors instead of their usual local ownership.” Egypt was also taking some positive steps, in his view.