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It’s been a red hot year for the debt market in the region, with companies and sovereigns alike tapping markets as GCC countries in particular eye further expansion and diversification — with several booming sectors like infrastructure, real estate, and banking seeking more capital.
It’s also been a good year for issuers looking to diversify their capital — we’ve seen more sukuk, more AT1 issuances, and more sustainability-linked bonds in our neck of the woods as banks’ work to set up regulatory frameworks for these types of issuances in the region bear fruit.
Who in the region is leading the charge in terms of issuances as we head into the end of the year, and how are spreads looking? In part two of our conversation with Hassan Orooj, Mashreq’s head of the debt capital markets syndicate, we discuss the outlook for debt issuances in the region in the final months of the year and heading into next year, which forms of debt are the most attractive to issuers in the region right now, and a lot more. Head over to part one of our conversation for his bigger picture insights into how global markets have performed so far this year, and how US politics can impact issuances here in the region.
Edited excerpts from our conversation:
E: Corporate and sovereign issuers in the region have been very active so far this year — do you expect this to continue in the final quarter and going into next year?
HO: Again, the US here is relevant. It’s all related to how Treasury rates affect issuances, but I do expect a lot of the sovereign issuances that we’ve seen this year to continue. I think Saudi Arabia is going to still continue to be a key driver in the GCC, and some of the other sovereigns will be more active, especially the ones that have recently been upgraded, like Oman.
And it’s not just sovereigns — we expect the same from some of those issuers from those countries where we’ve seen an improvement in ratings, and actually even possibly Egypt.
A lot of the corporates in our region have generally quite robust balance sheets, and what we hear from a lot of corporates is that rates are a bit high right now. The coupons are not what they were back in 2020 and 2021. Banks are willing to lend to me at quite competitive rates, but I’m happy to sit on my hands and wait for lower rates. Is that necessarily the right thing to do? It remains to be seen, but what we have noticed is a lot of the corporates with very strong balance sheets in the region are waiting it out and expecting lower rates come next year.
The risk to that approach is that rates might be lower next year, but possibly not by as much as they think. Some of those issuers that have been waiting on the sidelines — there’s only so long they can and should wait because they have certain plans that they need to work on. It’s still expected to stay busy, but they just might need to pay higher than what they initially were planning for.
E: What about in the UAE?
HO: The UAE is going to stay active. It’s easy sometimes for the UAE to be slightly overshadowed by Saudi Arabia just because of the sheer volume coming out of Saudi. But the UAE, let’s not forget, has been one of the key drivers of GCC issuance, and we expect that to continue.
We also expect the UAE to remain front and center when it comes to new types of issuances, so when we’re talking about ESG — especially after Cop28 last year — we’re seeing a lot more issuers issuing green and sustainable bonds out of the UAE. We expect that to become more prevalent. It’s taken time for banks to get set up properly to issue ESG, but that’s now coming into place. We’re going to start seeing a lot more issuances on that front from the UAE, especially from banks and financial institutions, which are more the drivers of issuances here, whereas in Saudi, it’s more so the sovereign and sovereign-linked players.
E: And what about sukuk? The UAE has been a big issuer of Sukuk this year, and so has the rest of the region and emerging markets — do you expect that to continue?
HO: We’ve seen over USD 38 bn of sukuk issuance this year, and we’ve actually topped last year — which was already busy at USD 37 bn, so sukuk is very strong this year.
You have the regular, sophisticated issuers who make multiple issuances a year; some of them are sovereign like the UAE. They like to use sukuk as a way to diversify. We all know that sukuk typically is viewed as something that is cheaper than conventional, but the more frequent issuers, at the same time, they use it to diversify. They can’t keep tapping the conventional market.
The newer names who have never been to the market before — their go-to type of product is sukuk. The reason is if you’re a debut name, there’s that much more of what we call execution risk. The sukuk format — and getting access to Islamic banks and investors — reduces the execution risk significantly — especially for the more high-yield debut names. For this reason, I expect sukuk to remain very strong.
E: And for Mashreq, what are the regions you’re looking at for debt issuances? I know the bank has been more active outside the region as of late. Is that approach here to stay?
HO: We have stepped up issuances outside of the GCC a lot as of late. We’ve done around 50 transactions this year, and that’s a record year for debt markets here at Mashreq. Around just under half have been from outside the GCC. That approach of trying to be active outside the GCC without losing our strong presence here has paid dividends.
What we are very happy to see is the markets opening up for some of the emerging market issuers, especially in Africa, for example, and we are very very hopeful that we’re going to see a lot more activity in the next 12 months.
Another interesting region for us is the Commonwealth of Independent States, especially Uzbekistan where we have been, for the past few years, excited about its prospects. We actually saw it materialize this year, and we were on several issuances and were actively involved in opening this new market to international investors. We expect the momentum to continue into 2025.
E: Regional geopolitical tensions in the region are likely going to be a bigger theme in the next few months and next year. How much do you think tensions will impact markets this next year — if at all?
HO: Being based here in the Middle East, geopolitical tensions in this wider region have been going on for many, many years now. Sometimes, it flares up in certain hotspots, then it calms down. We’ve seen these cycles before, and it’s got to the stage now where markets are able to look through a lot of the flare-ups. Yes, this year we have seen some escalations that historically we haven’t seen, but the market has persistently been positive despite all of this.
You can also see this in the oil price. Typically, you’d expect oil prices to sharply rise when there’s geopolitical tensions. But we haven’t seen that since October of last year.
