An estimated $72bn of the net sovereign issuance is expected to come from the Middle East and Africa this year. Nearly $44bn can be expected from four GCC countries – Qatar, Saudi Arabia, Oman and Kuwait.
Qatar will probably issue bonds/sukuks worth $10bn, according to Bank of America Merrill Lynch (BofAML). BofML expects external debt supply of sovereign and corporate debt to increase slightly in aggregate in 2018.
It has predicted overall sovereign gross debt issuance to decrease to $178bn as the sovereigns are turning towards local markets for funding.
The MEAF/GCC regions would account for around half of that.“Our credit analysts forecast corporate issuance will be $400bn.
This brings the total foreign currency external debt corporate and sovereign issuance forecast to $578bn, down from the 2017 high of $630bn, but much higher than the $450bn in 2016.”
The previous year saw high gross issuance and also high net issuance, much higher than 2015 or 2016 and back up at the 2012 level.
BofAML noted that the 2017-2018 sovereign supply will be remembered as the years of the GCCs.“We focus on net issuance for 2018, given the respectable debt management programs that higher quality emerging market countries have been implementing to manage their debt.
We forecast net issuance of $124bn for external sovereign debt, just slightly lower than in 2017, while gross sovereign issuance could come in at $178bn in 2018, similar to 2017.
We also expect that some additional asset/liability management programmes including exchange offers, bond calls and buybacks could increase the gross issuance if offset with new external debt funding,” BofAML analysts said.
According to analysts, the largest net issuers Qatar and Saudi Arabia will be followed by Argentina ($13bn) and Indonesia ($13bn). For gross and net issuance, it also include PDVSA with Venezuelan debt.
Net issuance vs gross issuance is relatively high in sovereigns because issuance is typically in longer bonds.
The expected synchronized global recovery will continue to be the main driver of inflows into Emerging Market (EM).The strong start for risky assets at a global level is reflected in EM, with equities and local market debt outperforming external debt.
BofAML expects EM to continue to rally despite stretched valuations. Positive growth dynamics and stable US real rates validate the price action.
Risks for EM external debt supply should be moderate in 2018, as growth is surprising to the upside and technicals are favorable.
BofAML predicts a tax-reform-driven rise in rates to be partly offset by further spread contraction.