The Daily Update - GCC: Increasing Investor Interest?

Earlier this week, Saudi Arabia raised USD7.5bn with a dual tranche dollar denominated debt issue that attracted USD27bn in orders, despite international outcry in Q4’18 over the killing of the journalist Jamal Khashoggi. Seemingly, in the absence of punitive sanctions and with the prospect of greater index inclusion Saudi Arabia still remains on investor radar screens.

Greater index inclusion is a theme that is turning investor attention to the GCC markets in particular. For example, JP Morgan is to include Bahrain, Kuwait, Qatar, Saudi Arabia and UAE in its Global Diversified Emerging Market Bond Index (EMBI-GD) in phases from January 31 2019. This is expected to lead to a significant increase in demand for sovereign bond issues: the IMF Middle East Regional Outlook for November cites estimates that ‘passive investment by index-tracking funds could amount to $30 to $45bn of new demand’.

The Kingdom of Saudi Arabia USD4bn 2029 maturity tranche was priced at 175 bps over Treasuries and the USD 3.5bn 2050 tranche at 230 bps over Treasuries. Using an A1 rating these issues trade ~2.6 credit notches cheap on our models. At this juncture we prefer Qatar which is more highly rated (Aa3/AA- by Moody’s and S&P respectively) although the sovereign paper is not notably cheaper: for example, Qatar 6.4% 2040 trades on a yield of 4.5% and ~2.7 notches cheap on our models, but a number of government related names do screen more attractively.

In December S&P revised its outlook on Qatar to stable from negative and affirmed its long term foreign rating of AA- : they expect Qatar to ‘effectively mitigate the economic and financial fallout of the boycott’ by Saudi Arabia et al and that it will incur ‘large recurrent fiscal and external surpluses over 2018-2021’. Towards the end of last year Qatar also announced it would withdraw from OPEC: we do not see this as escalating the impasse with Saudi Arabia et al. and we see merit in the argument that Qatar is looking to focus on its gas strategy given it is the bulk of its hydrocarbon mix and it is a small oil producer with less than 2% of OPEC production.

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