Kuwait closer to first sale of dollar debt

Kuwait is finalising plans for its first ever sale of dollar-denominated debt, extending the rush of mega-bond deals from Gulf states grappling with lower oil prices.

Bankers from at least two international banks flew to Kuwait City in the first week of January to discuss the emirate’s plan to make its debut on international markets and raise up to $10bn in early 2017.

The date of the sale will hinge in part on market reaction to Donald Trump’s first few weeks as US president, said one banker. “The timing is still hazy,” he added. “They want to wait until markets are relatively calm.”

Bankers in the Gulf said the government had yet to hire international banks for the issue, and could still delay the timeframe to April or May. “It is sometimes a bit difficult to get quick movement there,” said one.

Falling energy prices pushed Kuwait into an unusual budget deficit last year, and like other oil-rich Gulf Cooperation Council (GCC) states it hopes to take advantage of relatively low global interest rates to plug this gap with debt.

Last year, GCC sovereign borrowers raised $33bn on global debt markets, 10 times the amount borrowed the previous year, according to data from Dealogic.

The sales were led by mammoth dollar-denominated bond deals from Saudi Arabia and Qatar that established the Gulf as a new centre for emerging capital markets.

Saudi Arabia broke records with its $17.5bn debut sale in October 2016, which attracted $67bn in investor bids.

Kuwait is under less pressure to borrow than many of its neighbours thanks to a large sovereign wealth fund. Credit analysts say the state may secure lower borrowing costs than Saudi Arabia because of better economic metrics and the recent stabilisation of oil prices above $50 per barrel following a deal between Opec members.

However, the country has had trouble implementing domestic changes that could improve its finances.

Kuwait’s new parliament has a larger opposition bloc that is expected to fight government attempts to introduce fiscal reforms, such as energy price increases and constraints on public sector wages.

The risk of parliamentary pushback could postpone attempts to ease fiscal pressure by rolling back the country’s generous welfare state, increasing the need to tap bond markets.

Kuwaiti newspaper Al-Qabas reported last summer that the government was considering selling debt as early as September, but no plans were announced.

The delay means Kuwait is borrowing at a time when global interest rates are rising, following a US Federal Reserve rate increase at the end of 2016. However, the pipeline of new bond issuance from emerging market economies is not scheduled to slow as the result of higher borrowing costs.

Countries in the Middle East, including Saudi Arabia, are expected to continue tapping capital markets to fund deficits in 2017. Bank of Merrill Lynch forecasts total issuance to rise slightly, by $1bn.

However, credit analysts claim the increase in debt will not undermine credit profiles across the region.

“The recent rally in oil, combined with steps towards the diversification of GDP growth, should lead to an improvement in external and fiscal balances across most GCC countries,” said Eirini Tsekeridou, fixed-income analyst at Julius Baer, the Swiss private bank.