A lot of our favoured sovereign and quasi-sovereign Eurobonds from the GCC have been strong performers over the past 18 months; this is despite ratings downgrades resulting from their high dependency on oil prices and weakened sovereign credit profiles due to deteriorating current account and fiscal balances, along with increased government debt levels. This most likely reflects that a lot of the issues were already trading several credit notches cheaper than their rating warranted, that their credit profiles although weakened are still robust and the continued search for yield across fixed income markets.
Qatari issues have been under some modest selling pressure over the past couple of weeks on the back of the spat with Saudi Arabia and its allies but we see it as being in all parties best interests to resolve this diplomatically and we retain our Qatar holdings. Kuwait, a founding member of the GCC, has taken a prominent role in trying to mediate and resolve the Saudi-Qatar disagreement and perhaps bringing attention to a compelling sovereign investment.
In March the Government of Kuwait came to market with a debut USD8bn Eurobond issue rather than drawing down from its sizeable asset base/sovereign wealth funds. Kuwait’s debt to GDP is low and projected at 26.1 percent in 2017 and as Moody’s note its ‘extraordinarily strong balance sheet, very high wealth levels and vast hydrocarbon reserves continue to support a credit profile that remains consistent with an Aa2 rating.’ It scores highly in terms of its institutional strength instilling confidence it will ‘implement its fiscal and economic reform program to preserve creditworthiness in the medium-term, which has the stated objective of diversifying and enhancing the economic base and its budgetary revenues.’
Kuwait’s NFA position remains extremely strong and this is expected to remain the case: the current account position is projected at a surplus of 5.7% of GDP for 2017 and the fiscal position is also helped by a low fiscal breakeven oil price which the IMF estimates at USD49.1 for 2017 and USD50.4 for 2018. While the fiscal balance has fallen from a surplus of 29% in 2014/15 to a projected deficit of 0.9% for 2016/17, it is considerably lower than some of its GCC peers. Thus, Kuwait has deservedly retained its Aa2/AA rating from Moody’s and S&P respectively. On May 26, Moody’s affirmed this rating and the outlook was moved to stable from negative.
The Kuwait International bond 3.5% 2027 still looks attractive to us trading at a yield of 3.17% and almost 3.4 notches cheap on our models using an Aa2 equivalent rating.