Kuwait Times, Wednesday, Jan 11, 2023 | Jamadi Al Thani 18, 1444
High inflation, rising interest rates sent bond market crashing in 2022
Kuwait:
Persistent inflation and rising interest rates
across the globe sent bond markets tumbling resulting in the biggest decline in
the benchmark since at least 1990. Geopolitical tensions surrounding the
Russia/Ukraine war also affected markets during the year. The Bloomberg
Aggregate global IG bond index dropped by 16.3 percent during 2022 and it was
the first time that the index has declined for two consecutive years after the
4.7 percent decline in 2021. The year 2022 witnessed central banks raising
borrowing costs by the most in four decades in order to tame inflation that
reached unprecedented levels following the loose monetary policy implemented in
2020 and 2021 aimed at providing a boost to business activity after the COVID-19
pandemic.
The yield on 10-year US treasury bonds shot up from 1.5 percent at the end of
2021 to 3.9 percent at the end of 2022, the biggest annual increase since at
least 1962. Moreover, it was one of the exceptional years when both the bond
market and the equity markets witnessed declines. A report from FT showed that
stocks and bonds lost around $35 trillion in value during 2022. In terms of type
of instruments, high yield bonds outperformed safer bonds with a relatively
smaller decline.
Moreover, sukuks witnessed the smallest decline of around 10.8 percent. In terms
of regional performance, MENA bonds and sukuks outperformed global benchmarks
with smaller declines during the year mainly reflecting continued strong
economic growth, elevated crude oil prices and relatively low inflation. The
robust fiscal performance in the MENA region was also reflected in the primary
bond and sukuk market in the region that witnessed one of the biggest y-o-y
declines on record.
Aggregate fixed income issuances in the MENA region declined for the first time
in three years to reach $115.2 billion in 2022 as compared to $236.5 billion in
2021, a decline of $120.3 billion or 51.3 percent. Government issuances
witnessed a bigger decline of $86.7 billion or 55.3 percent to reach $70.1
billion as compared to corporate issuances that dropped by $34.1 billion or 43.1
percent to reach $45.1 billion.
Fixed income issuances in the GCC dropped to the lowest in seven years to reach
$86.3 billion during the year.
Total issuances reached $68.7 billion during the year, a decline of 61.6 percent
or $110.2 billion as compared to record issuances during 2021 which stood at
$178.8 billion. The decline in issuances was mainly driven by Egypt that
reported total issuances of $12.9 billion in 2022 as compared to record high
issuances of $62.2 billion during the previous year. Bond issuances by GCC
countries declined for the second consecutive year owing to lower issuances from
both governments as well as corporates mainly led by elevated oil prices as well
as strong corporate profitability that led to lower funding requirements.
Aggregate bond issuances in the GCC stood at $39.8 billion in 2022 as compared
to $88.0 billion in 2021, while non-GCC MENA countries recorded a steeper
decline with issuances of $28.9 billion in 2022 as compared to $90.8 billion
during 2021.
In terms of type of issuer, bonds issued by MENA governments continued to
account for the bulk of fixed income issuances during the year. However, the
share of governments in total issuances declined for the second consecutive year
to 64.9 percent in 2022 as compared to 68.1 percent in 2021.
Both government and corporate issuers in the GCC reported a decline in sukuk
issuances during the year. Total government sukuk issuances during 2022 stood at
$29.5 billion vs $35.4 billion in 2021. The decline was led by a drop in
issuances mainly in Saudi Arabia, Qatar, Oman and Bahrain. On the corporate
hand, all countries in the GCC reported a decline in sukuk issuances during the
year.
Interest rates
The year 2022 witnessed record levels of interest rate hikes globally that was
aimed at controlling consumer prices. The rate hikes were also aimed at cooling
down economic growth that would further help in controlling inflation. In the
US, wage growth and robust employment numbers resulted in elevated consumer
prices and the trend continues as we speak. This has resulted in hawkish
policies by the US Fed that was followed by most major central banks across the
globe. The US Fed raised policy rates at one of the fastest pace on record by
425 bps during 2022 to a mid-point of 4.38 percent. These hikes were almost
fully replicated by GCC central banks mainly due to the pegged currencies.
Kuwait was an exception in the GCC as the Kuwaiti dinar is pegged to a basket of
currencies. Moreover, due to minimal fiscal pressure and robust economic growth,
the Central Bank of Kuwait (CBK) followed a more gradual rate hike path during
the year with a total increase of 200 bps to the discount rate that reached 3.5
percent by the end of the year.
GCC bonds and sukuk maturities are expected at $67.5 billion for 2023 and the
refinancing of these instruments are expected to account for the bulk of the
issuances by corporates and governments in the region this year. That said, the
higher cost of borrowing and strong profitability coupled with cash generation
is expected to discourage some refinancing activity in the near term. We expect
fresh issuances to be back-end loaded once stability is seen in global interest
rates and exchange rates.
We expect corporate issuers to come back to market during the latter half of the
year once market conditions seem favorable. Sovereigns in the GCC are expected
to report fiscal surpluses due to elevated oil prices. This is expected to limit
overall issuances, although with diversification as a primary goal for most
governments, we can expect to see project-specific issuances during the year.