The Middle East has proven to be a challenging economic climate to work in over the last year, thanks to the steep fall in the price of oil. From its peak of over $110 a barrel, the price has hit lows not seen for a decade. With the region’s reliance on oil exports, the Middle East has become one of many economies forced to quickly adapt.
The drop in income is posing several challenges to governments and institutions working to keep the region’s economy moving forward. In order to keep money flowing, many have begun increasing the amount of debt they issue. This has led to a rapid evolution of the debt sector in a very short amount of time. Naturally, this has created many new opportunities for investors looking to work in a quickly evolving environment. Mrassociates had the opportunity to speak to Khaled Fouad, Chief Investment Officer at , about how the Middle Eastern debt market has evolved and what it will look like in the near future.
What has the environment for investment activities in the GCC market been like since the 2008 financial crisis?
As with all major financial centres, the GCC was hit by the crisis; finance and real estate were the most affected sectors. In February 2009, the S&P GCC composite index was recorded at 65.2, losing 63 percent of its value from an all-time high of 177.2 in February 2008. It then rallied to reach 147.6 in August 2014, driven primarily by favourable macroeconomics and positive business environment. The good thing about the financial crisis is that it emphasised the importance of market regulations and economic reform. Saudi Arabia, the United Arab Emirates and Qatar have since introduced pro-business regulations to drive economic growth and lessen reliance on oil and gas. Likewise, Kuwait has recently embarked on a similar plan to overhaul its financial market infrastructure with the objective of achieving emerging market status within the next few years.
How has this climate started to change in recent years?
In the debt capital market, there are two key underlying drivers changing the market climate: the first is the Basel III requirements for financial institutions, and the second is government budget deficits among the GCC countries, leading to sovereign bond issuance.
On a like-for-like rating, GCC bonds continue to pay a slight premium compared to international counterparts
First, overall, under the guidance of central banks, financial institutions have enhanced the quality of assets and the liquidity of funding requirements. Financial institutions, which are the backbone of the economy, have started to restore market confidence in their business activities. Moreover, there is market consensus among financial institutions and investors, which indicates uncertainty has been removed and predictability has been improved by the collective efforts of market participants in the region.
In relation to the second point, due to the significant drop in oil prices, all the GCC governments have budget deficits. Notwithstanding the vast amount of sovereign wealth funds capable of financing investment plans, GCC governments have rightly opted to tap into international capital markets and implement strategic austerity measures.
With regard to the GCC debt market in particular, what opportunities are available at present?
The first half of the year saw some considerable debt issuances, where most of the GCC’s debts were priced well, were investment-grade, and were largely denominated in US dollars. Considering this, GCC debt markets will remain as an attractive investment in the future, providing appealing opportunities for investors on a risk-adjusted basis. On a like-for-like rating, GCC bonds continue to pay a slight premium compared to international counterparts.
More opportunities are now expected from quality issuers, including financial institutions and local government entities, which will lead debt capital markets to become more active and attractive in the coming years.
What challenges still need to be overcome in the debt market?
One of the main challenges facing the region’s debt capital markets is a lack of depth. This is primarily due to the ‘hold-to-maturity’ mindset of regional institutional investors. More frequently than not, these investors, who comprise the largest holders of the paper, are reluctant to part ways with their holdings. This leads to thin trading and illiquidity in the secondary market. The latter has a ripple effect on banks that are reluctant to lend against these illiquid debt instruments. Local investment banks are leading the efforts to make a market in these instruments to support the capital market’s activities.
Another challenge is to up the ante on the regulatory framework so it is in line with international best practices. We are optimistic capital market authorities and debt management offices are capable of introducing effective debt management policies, borrowing strategies and risk management guidelines.
Finally, the lack of a cost-efficient local currency to USD exchange market remains an impediment to hedging currency risks, thereby limiting regional and international participation in local debt instruments.
Moving on to bonds and sukuk issuance, can you explain the recent hike in interest in these, and do you see this trend continuing?
The main reason behind the recent hike in issuances is the historically low cost of borrowing, which makes it extremely attractive for borrowers to raise funding through debt markets. Along with GCC governments’ need to cover their budget deficits, banks have also seen an increase in issuances in order to the regional central banks’ capital requirements, in accordance with Basel III guidelines.
Kamco’s assets under management
As investor demand for GCC fixed income products remains solid, we expect this trend of debt issuances in the GCC to continue. With more debt sales due to the low interest rate environment, this offers an opportunity to issue debt at low rates, which can be secured for longer terms. In addition, regardless of the projected high supply, GCC bonds have maintained solid demand. This highlights the market’s search for higher yielding issuances accompanied with solid credit ratings issued by the region’s sovereigns and large corporations.
Furthermore, we consider bond issuance to be yet another building block in supporting the capital markets of Kuwait and the wider region. We progressively work towards developing and enhancing the private sector, the Kuwaiti economy and the GCC economy through diverse investment opportunities.
How is Kamco positioning itself in this promising landscape?
Kamco Investment Company, a leading investment management company with more than $11bn in assets under management, was ranked among the top 15 international lead managers and book runners in the GCC, Middle East and North Africa bond markets. Kuwait also ranked first in Bloomberg’s Europe, Middle East and Africa fixed income league tables for the first quarter of 2016. Our strong track record and holistic investment bank services always distinguish us from others, and we are very proud of having a professional, dedicated deals team, who always exceed our clients’ expectations with excellence in their core competencies.
Our unique client-orientated approach, which always fulfils the promises made to our clients, has proven our reputation for trustworthy, quality services. As a trusted and reliable advisor, Kamco has achieved what our clients have dreamed of for their investment portfolios, covering equity capital markets, debt capital markets and advisory services.
In addition, under our Vision 2020 plan, Kamco is reshaping itself towards being a preferred regional fully-fledged investment banking provider. As a part of its strategic direction, Kamco opened a branch at the Dubai International Financial Centre (DIFC) in 2016. In terms of expanding the company’s reach within regional and international markets, we believe opening an office in the DIFC will help move us to the next level by providing new opportunities for development and growth.
What makes Kamco stand out from its rivals, and what’s in store for the company in the future?
Kamco boasts a range of culturally diversified professionals from many countries, all possessing profound experience and excellent educational backgrounds. Furthermore, local market players observe Kamco’s corporate culture is very different from that of its competitors, and in fact Kamco acts as an example for other ‘people-first’ companies. This people-orientated corporate culture attracts the best talent to Kamco, in addition to establishing the best investment banking practices, both in Kuwait and the wider region.
Currently, Kamco has the public image of a ‘trusted Kipco company’. Under our current strategic direction, we hope to transform our business identity into that of a ‘trusted independent advisor’, with innovative and fully fledged investment services, covering Kuwait, and regional and international capital markets. In order to achieve our Vision 2020 plans, we have already introduced an enterprise resource planning system into Kamco’s infrastructure, which enhances our efficiency and focuses on our core business competencies. Finally, we plan to expand our geographical presence to the United Arab Emirates via our branch in Dubai, which will be used as a springboard to serve regional and international clients.