The Daily Update - GCC Bonds in Demand

Greater index inclusion continues to build investor interest in and attract flows into the GCC markets: For example, JP Morgan is including Bahrain, Kuwait, Qatar, Saudi Arabia and UAE to its Global Diversified Emerging Market Bond Index (EMBI-GD) in phases from January 31 2019.  With this in mind, it came as little surprise that after solid performance YTD and a general tightening in spreads across much of the region Qatar returned to the primary market with a 3 tranche 5Y/10Y/30Y USD10bn issue. Such was investor demand (USD50bn order-book) the issue ended up being up-scaled to USD12bn in size and the issue spreads were tightened 20-25bps to 90bps, 135bps and 175bps respectively over USTs. Qatar remains one of our favoured issuers in the region given its high rating of Aa3/AA-/AA- by Moody’s/S&P/Fitch respectively, strong fundamentals and attractive valuations. For example, using an AA- rating the State of Qatar 4% 2029 tranche came ~3.4 credit notches cheap on our models.

Oman also found itself on the newswires but for a different reason as Moody’s downgraded the rating to Ba1 (negative outlook) from Baa3 stating: ‘The key driver of the downgrade is Moody's expectation that the scope for fiscal consolidation will remain more significantly constrained by the government's economic and social stability objectives than it had previously assessed. As a result, in an environment of moderate oil prices, Oman's fiscal metrics will weaken to a level that is consistent with a lower rating.’ While they acknowledge ‘Oman's inherent credit strengths’ they see fiscal and current account deficits ‘perpetuating Oman's dependence on steady inflows of external financing and denoting material external vulnerability.’

Oman is now rated as ‘junk’ by all 3 rating agencies. However, the move was largely expected with S&P/Fitch having already downgraded it. Growing investor interest in the region has offered support as the Oman sovereign curve has performed well this year (despite Oman already being included in JP Morgan indices) although there has been an element of ‘catch up’ after a torrid period at the end of 2018 culminating in Fitch downgrading it to sub-investment grade in December: For example, the spread on Oman 5.375% 2027 has tightened from 485bps over USTs at the start of January to ~396bps over USTs at the time of writing. Yesterday, the Oman curve was only showing a small widening in spreads into the close once the market settled after an initial flurry of activity and 10-15bps widening at the open.

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