The Gulf Cooperation Council's (GCC) sovereign Eurobond issuance volumes will remain high in 2017 – but below 2016's record levels – as governments seek to fund sizeable deficits at a time of strong investor demand, Moody's Investors Service said in a newly released report. However, movements in the oil price and global interest rates, together with factors such as the extent of fiscal reform and funding strategies, will determine overall issuance needs, and the impact on sovereign credit profiles. "The sharp oil price drop in 2015-16, coupled with the limited depth of domestic markets and a favorable global interest rate environment, underpinned record aggregate international debt issuance by GCC governments in 2016," said Steffen Dyck, a Moody's Senior Credit Officer and co-author of the report. In 2016, GCC governments raised a combined $38.9 billion through international bonds to become the largest type of issuer on the regional fixed-income market. In 2017, Moody's anticipates around $32.5 billion of sovereign international bond issuance, representing about 21% of the aggregate gross financing requirements for GCC sovereigns in 2017. Although Saudi Arabia, Kuwait and Oman will partly draw down on the government's sizeable sovereign assets, Moody's anticipates that favorable market conditions and the limited depth of many of the region's domestic financial systems mean that all GCC issuers, with the exception of Abu Dhabi, will head to the international market again in 2017. International debt issuance by GCC governments has helped to stem declines in foreign exchange reserves in many countries, as well as the need to liquidate financial buffers. It also supported domestic liquidity. Establishing a sovereign benchmark yield curve can facilitate international capital market access for non-sovereign issuers. Moody's expects these effects to largely prevail in 2017. Moody's views the fact that most GCC sovereigns were able to access the international bond market in fiscally challenging times as a credit-positive. However, the financing of continued fiscal deficits will lead to weaker net asset positions or rising net debt. — SG
