The past month has shown debtor nations with excessive net foreign liabilities and dependent on external capital are vulnerable to the Fed tightening policy and reining in US dollar liquidity. At this point in the cycle we continue to favour positioning portfolios in creditor nations and countries with net foreign liabilities less than 50% of GDP: IMF research indicates levels above this threshold are associated with increasing risk of external crises.
We continue to like selected GCC member states such as Abu Dhabi, Qatar, Kuwait and Saudi Arabia for their strong net foreign asset buffer positions with the added benefit that a lot of the sovereigns and quasi-sovereign issues are highly rated and trade attractively on our valuation screens. For example, Abu Dhabi 4.125% 2047, rated Aa2/AA by Moody’s/S&P, trades on a yield of 4.7% - over 4 credit notches cheap on our models.
On June 8, S&P reaffirmed their AA long term foreign currency rating for Abu Dhabi with a stable outlook. They note: ‘The ratings are supported by Abu Dhabi's strong fiscal and external positions. The exceptional strength of the government's net asset position provides a buffer to counteract the impact of oil price swings on economic growth, government revenues, the external account, and increasing geopolitical uncertainty in the Gulf region.’ That said, the rating is constrained as the political institutions are at a ‘nascent stage of development’ compared to some of its rating peers, data disclosure could be improved, the bond market is relatively underdeveloped and the UAE dirham peg to the US dollar is a constraint to monetary policy.
Stronger oil prices are also providing the GCC member states with greater budget flexibility. Recently, Abu Dhabi approved a 3 year fiscal stimulus package valued at AED50bn (USD13.6bn) to support growth and create jobs; GDP is growth is only forecast (Moody’s) at 1.2% for this year. Moody’s noted that this stimulus amounts to ~5% increase in government spending. However, the government used a $50/bbl price in its 2018 budget yet oil prices have averaged over $65/bbl since the start of the year. Moody’s estimate that if oil prices exceed $60/bbl while the package is implemented the increased hydrocarbon revenues will cover the cost.