On Monday, markets traded in risk-off mode spooked by the uncertainties and growing economic impact of the coronavirus as more countries are enforcing lockdowns. Global equity markets endured another day of punishing falls with the Dow Jones index falling 12.93%, the worst fall since 1987. USTs rallied with the yield on the UST 10-year yield ending the day at 0.72%. At the time of writing on Tuesday morning, the UST yield is around 0.8% while European equities having opened higher have conceded some gains and are trading mixed, although the S&P500 future is currently in positive territory.
Kristalina Georgieva, Managing Director of the IMF continues to advocate further fiscal policy in her blog: “As the virus spreads, the case for a coordinated and synchronized global fiscal stimulus is becoming stronger by the hour,” going on to make the point that more is going to be required “During the Global Financial Crisis (GFC), for example, fiscal stimulus by the G20 amounted to about 2 percent of GDP, or over $900 billion in today’s money, in 2009 alone. So, there is a lot more work to do.” Yesterday, France ramped up its policy response announcing a complete country-wide lock-down and aid package of €45bn and €300bn of state guarantees for bank loans to companies. Steven Mnuchin, US Treasury Secretary, is reported to be rallying Senate Republicans to pass fiscal measures in the US and is reported to be seeking a “big number” for additional measures.
In the GCC region governments have also been using fiscal stimulus to steady their economies. Earlier this week, the UAE announced a USD27.2bn program and Qatar announced a USD 20.6bn stimulus package. While lower oil prices in conjunction with a global growth hit due to coronavirus are credit negative for the GCC region, we see these as posing the greatest threat to lower rated issuers such as Oman and Bahrain: these countries have the weakest asset buffers and reserves to cushion period of weaker growth and any fiscal or current account deficits. Abu Dhabi (rated Aa2/AA by Moody’s/S&P) and Qatar (rated Aa3/AA-), our favoured sovereign issuers in the region, are better positioned to ride out the period of weaker oil/energy prices and weak growth given their sizeable reserve buffers.