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.