Capital markets hit by Covid slump

28 December 2020
The pandemic has led to a sharp fall in the number of listings, but it has also driven governments to the bond market to finance their large deficits

This package also includes:

Weak economic growth looks set to persist
Expo 2020 forges ahead with confidence
Mena lenders trudge into tougher year

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As with so much else, the Covid-19 pandemic cast a shadow on initial public offerings (IPOs) in 2020. 

The year began in a promising fashion, with three new listings in the first quarter, raising $762m, according to data compiled by UK-based consultancy EY. That was well ahead of the first-quarter total for the four preceding years.

The three listings included Dr Sulaiman Al-Habib Medical Services Group on the Saudi Stock Exchange (Tadawul) in March, the fourth largest IPO across Europe, Middle East and Africa this year, according to UK-based consultancy PwC.

However, the coronavirus all but closed off the market in the second quarter, when there were no listings in the Arab world for the first time in more than a decade. There was, however, one notable IPO in Iran, where Social Security Investment Company (Shasta) sold $400m of shares in April, the Tehran Stock Exchange’s largest listing to date. 

Virtual roadshows

The following three months were little better, with just one IPO in the third quarter, when Saudi Arabia’s Amlak International for Real Estate Finance raised $115.9m on the Tadawul after a virtual roadshow. That “proved virtual roadshows could be the way forward for the region”, says Gregory Hughes, IPO and transaction diligence leader for the Middle East and North Africa (Mena) region at EY.

The Amlak listing took the Saudi IPO total to three in the first nine months of 2020, compared with one on the Egyptian Exchange and none in other major economies such as the UAE. 

There were signs of a revival in IPOs in the final quarter of the year. Saudi grocery chain BinDawood Holding listed its shares on the Tadawul in late October and Saudi White Cement Company made its debut on the Nomu Parallel Market, becoming the first direct listing on the kingdom’s secondary market.

Even so, market activity is not as robust as the authorities would like and some countries have tried to create greater liquidity. Among a series of liberalising measures announced in late October, the UAE raised the maximum amount of shares a company can list via an IPO from 30 per cent to 70 per cent, which observers said should boost interest in the market.

Potential listings

The pipeline of potential new listings is reasonably long, although heavily concentrated in just a few markets. According to EY, there are at least 30 companies weighing the idea of a stock market listing, but most of them are in either Egypt (11 candidate companies) or Saudi Arabia (10). Beyond those two markets, there are a further four potential listings in the UAE, two apiece in Kuwait and Qatar, and one in Oman. 

“We expect IPO activity to pick up in 2021 as the vaccine becomes available globally and the uncertainty around the US elections and policies towards the region are settled,” says Hughes. “There is a healthy pipeline of companies looking to list regionally, with Saudi Arabia continuing to dominate as the centre of activity due to the high valuations and strong liquidity compared with the rest of the region.”

However, some companies thinking of listing may still prefer to wait until markets have full recovered and there is greater certainty about coronavirus vaccines and a wider economic recovery. The region’s bourses fell sharply in the early months of 2020 as the impact of Covid-19 started to become apparent. The improvement since then has been gradual at best. One issue holding back the markets is international investor sentiment.

“Even after Covid-19 dissipates, the reception for traditional real estate, banking, retail and energy companies may not be what it once was,” says Hasnain Malik, Dubai-based head of equity research at UK-based Tellimer. 

“Two specific challenges for the Mena region are the distrust and frustration of foreign investors with state-dominated companies, with the public sector still the main source for future IPOs; and the success of overseas listing venues such as London in attracting mid-scale IPOs, because of ease of access for institutional investors.”

Bond issues

In contrast to the limited amount of action on the IPO market, debt capital market activity was far more extensive in 2020, with the coronavirus pandemic again the main factor. Governments have been forced to run up large budget deficits due to a combination of lower revenues from oil and other sources, and higher spending to prop up their locked-down economies. 

According to PwC, sovereign issuances were the main driver in the first half of the year, including $5.4bn of Islamic bonds (sukuk) issued by the Saudi government, and a $385m bond by Oman. Corporate issuance was also notable, including two sukuk issuances by Saudi-based Islamic Development Bank – $2bn in February and $1.5bn in June. Dubai Islamic Bank issued a $1bn sukuk in early June and First Abu Dhabi Bank (FAB) was also in the market.

“The region [was] a big issuer [in 2020],” says Stuart Culverhouse, head of sovereign and fixed income research at Tellimer. “Taking the GCC and Jordan together, they issued about $50bn equivalent in hard currency bonds, about 26 per cent of total sovereign hard currency issuance in emerging markets.” 

The figure would have been higher still if Kuwait’s government had had the ability to issue debt. However, it has still not managed to pass a new law through parliament that would allow it to do so. 

The situation in 2021 could look rather different. If effective vaccines are rolled out, it will allow normal economic activity to resume and drive up global demand for oil. London-based Capital Economics said in late November 2020 that it had upgraded its forecast for global economic growth and oil prices in 2021 as a result of the potential for lockdown restrictions to be eased following promising results from the trials of vaccines being developed by pharmaceutical firms Oxford/AstraZeneca, Pfizer/BioNTech and Moderna.

Recovery predicted

Capital Economics now predicts global growth of 6.8 per cent and says oil could rise to $60 a barrel by the end of 2021. That would still not be enough to return the budgets of most regional oil producers into surplus; the fiscal breakeven prices of at least nine countries are still above that threshold, ranging as high as $414.8 a barrel for Libya and $521.2 for Iran, due to a combination of warfare and sanctions, which have reduced their ability to export crude. 

However, it would sharply reduce the deficits of many governments and cut their need for debt. According to the IMF, the fiscal breakeven prices of Iraq and Kuwait are $63.6 and $64.5 a barrel respectively, while the UAE is at $75.9 and Saudi Arabia is at $78.2 a barrel.

“I think issuance will remain high [in 2021], but not to the same extent as [2020], mainly because budget deficits in the region are generally expected to narrow, especially in Saudi Arabia and the UAE,” says Tellimer’s Culverhouse.

Tellimer estimates the combined fiscal deficit across the GCC and Jordan will fall from $132bn in 2020 to $88bn in 2021. “If this is funded in the bond market in the same proportion as [2020], that implies a fall in issuance to $33bn next year,” says Culverhouse. 

“That said, there is sizeable amortisation on bonded debt due [in 2021] across the region, which we estimate at $14.5bn, compared with just $4.5bn [in 2020]. Depending on how this is refinanced, it could increase total issuance towards [2020] levels.” 

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