External headwinds and an extended period of low oil prices have prompted a strong wave of debt issuance across MENA in 2020. This week, we analyse the debt market in the region, highlighting how governments have responded to the pandemic by opting to borrow rather than liquidating assets to fund their fiscal deficits.
We see sovereign sukuk issuance in the GCC already getting a boost this year and expect it to continue to expand in the next few quarters, helping deepen capital markets as mounting deficits are funded. The recovery in market conditions, along with stimulus measures implemented by central banks across the GCC and easing capital requirements have normalised bond spreads and pricing correlations. We expect, going forward, that this will free up liquidity in the banking system, and support healthy demand for sukuk.
Record-low global interest rates and the increase in risk appetite have boosted government reliance on domestic financing, and while the demand for short-term local currency debt remains relatively weak compared to emerging market peers, investment-grade GCC markets have been able to issue longer-than-usual debt maturities in foreign currencies, attracting strong foreign demand. This week, we also discuss the return of international investor appetite for Egypt’s bond market and the improvement in its yield curve, which has been inverted for the last two years. This has been fuelled by the Central Bank of Egypt’s ability to stabilise its currency against the dollar, with the IMF programme as an anchor.
Downside risks remain, however, as the high level of uncertainty regarding the length of the pandemic and potential renewed volatility in global oil markets continue to present a bleak economic outlook. This in turn could drive the region’s debt to GDP ratios even higher. We explain why we think regional debt is still a good deal, despite rising ratios.