Brent Crude is languishing around $27.50 per barrel despite the recent OPEC+ agreement to reduce supply as the ‘Global Lockdown Recession’ induced collapse in demand is still resulting in an oversupplied market. Hence, it is not surprising that GCC sovereign issuers have been taking the opportunity to tap global bond markets to help fund the resulting fiscal deficits.
To put this in perspective, the IMF’s latest Regional Economic Update for the Middle East and Central Asia (released yesterday) forecasts real GDP growth in the GCC region will contract 2.7% in 2020 and the fiscal deficits region would increase to 10.4% of GDP as Covid-19 related stimulus and low oil prices impact. Updated IMF estimates put the 2020 fiscal breakeven oil prices for investment grade rated Saudi Arabia at $76.10 per barrel, $69.10 for UAE, $39.90 for Qatar, and junk rated Oman at $86.80 and $95.60 for Bahrain.
Yesterday, the Kingdom of Saudi Arabia came to the market with a multi tranche USD7bn issue with reports suggesting the final order book reached USD54bn. Not surprisingly, the issue spreads were tightened by 55bps from initial guidance to UST+260bps on the 5.5 year maturity and UST+270bps on the 10.5 year maturity. The 40-year bond was issued at a yield of 4.55% (from initial guidance of 5.15%).
Saudi Arabia is rated A1 (stable)/A (stable) by Moody’s/S&P. S&P note in a recent report: “our estimate of Saudi Arabia's strong net asset (stock) position on both its fiscal and external balances continues to be a key ratings support. Despite the sharp increase in fiscal deficits, the general government will remain in a net asset stock position of 65% of GDP in 2020-2023, albeit falling from 80% of GDP in 2020 to 54% in 2023.” However, we continue to prefer Abu Dhabi and Qatar rated Aa2/AA and Aa3/AA- by Moody’s/S&P respectively. Their stronger credit profiles warrant higher ratings while a number of the longer dated issues screen attractively: For example, Abu Dhabi 4.125% 2047 trades over 4 credit notches cheap on a yield of ~3.7%.