Confident Gulf bond market shrugs off S&P downgrades

Updated 10 February 2015

Confident Gulf bond market shrugs off S&P downgrades

DUBAI: Confidence that the Gulf oil exporting states can ride out an era of cheap oil supported prices of their international bonds on Tuesday after Standard and Poor's cut its debt ratings or outlooks for several of the countries.
Taken together, S&P's actions were the biggest move by a rating agency in the Gulf since the price of Brent crude plunged below $60 a barrel in December, from $115 last June.
S&P cut its outlook for Saudi Arabia's "AA-/A-1+" foreign and local currency credit ratings to negative from stable.
It lowered the ratings of the two financially weakest states in the Gulf Cooperation Council by one notch — Bahrain fell to "BBB-/A-3", and Oman to "A-/A-2" — while affirming the ratings of two of the strongest, Abu Dhabi and Qatar.
But Gulf bond prices barely moved on Tuesday. The spread of state-controlled Saudi Electricity Co.'s US dollar sukuk maturing in April 2023, one of the most liquid international Saudi credits, against 10-year US Treasury bonds edged up just 1 basis point.
The spread of Bahrain's dollar sovereign bond maturing in August 2023 against 10-year US Treasuries rose 5 bps. Bank Muscat, Oman's biggest bank, saw the spread of its 2018 dollar bond against five-year US Treasuries widen 2 bps.
"I believe credit spreads for the region will increase over time, but maybe not markedly just because of these actions" by S&P, said Abdul Kadir Hussain, chief executive at Mashreq Capital in Dubai.
"Many regional investors tend to buy and hold, and hence these actions are unlikely to be followed by a lot of selling."

Several factors are behind the bond market's strength. One is the large base of cash-rich Gulf funds and institutional investors who are eager to invest their money and willing to buy into any selling of bonds by foreigners.
This is a powerful force, especially when combined with a recent drop in bond supply from other emerging markets and the European Central Bank's launch last month of radical monetary easing, which is spurring European funds to hunt for yield.
"Long-only local investors are up to the gills in these regional bonds, and this is a lot of vanilla debt with government support," said the debt capital markets head of a European bank in the Gulf.
"The oil price drop has been factored in with marginally wider spreads, and now the market is cheering increased European investor interest."
More broadly, the market's calm can be taken as a vote of confidence that the rich Gulf states have amassed enough financial reserves, and are deploying them effectively enough, to cope with low oil prices for a few years at least.
Saudi Arabia, for example, has projected a record state budget deficit of $38.7 billion for 2015, and the actual deficit may be much larger if oil stays below $60. But it can cover deficits with $245 billion of reserves at the central bank, excluding other assets and its ability to borrow.
In its statement on Monday, S&P signalled any Saudi rating cut might not come soon — it said ratings might be lowered over the next two years — and described the government's current financial position as "very strong".
Movements in bond spreads suggest the oil price slide caused a small increase in concern about Saudi credits late last year — Saudi Electricity Co's spread widened from 108 bps last October to 146 bps in mid-December.
Since then, however, concern seems to have evaporated; the spread was back at 107 bps on Tuesday. This follows a stabilization of the oil price since mid-January, and pledges by Saudi officials to keep spending heavily to offset the economic impact of cheap oil.
Bahrain's bonds were hit much harder last year; its spread ballooned from 195 bps in October to 310 bps in mid-December. But it has since narrowed back to 220 bps, partly because investors think rich Gulf states will if necessary support Bahrain for geopolitical reasons.
Bank Muscat's spread widened to as much as 119 bps in mid- December but is now back at 82 bps, near its October level of 80 bps.
In fact, Gulf bonds have outperformed the rest of the world in recent weeks. The S&P Middle East and North Africa bond index is up 2.61 percent year-to-date, against a negative return of 2.48 percent for the S&P/Citigroup International Treasury bonds ex-US index.
Hussain at Mashreq Capital said Gulf bond spreads could widen later this year if the supply of regional paper increased. Bahrain, for example, may issue more bonds to cover an expanded budget deficit.
"Once new supply starts hitting the market, which I suspect will be in the next couple of months, then I think spreads would widen out to reflect the change in credit dynamics of the region."
However, any widening may be minor, and some governments may turn to their liquid local currency markets rather than issuing bonds internationally. Saudi Arabia's central bank chief has said the Saudi budget deficit may be covered partly by domestic borrowing, partly because of low domestic costs.
Sergey Dergachev, senior portfolio manager for emerging market debt at Union Investment Privatfonds in Germany, said he had used the small sell-off in Middle East credits on Tuesday to increase his exposure, buying Saudi Electricity bonds.
"I think yields on Bahraini papers could widen 5-10 bps more, but then will stay or marginally tighten. I do not expect a sell-off in Bahraini debt, mainly since their bonds have a very strong buy-and-hold investor base, and are strongly technically supported."

Saudi business chiefs back 2020 budget

Updated 10 min 54 sec ago

Saudi business chiefs back 2020 budget

  • 2020 spending plan hailed as a positive driver in boosting country’s economy

RIYADH: Saudi businesses have welcomed spending plans of SR1.02 trillion ($272 billion) next year, announced by King Salman.

The Council of Saudi Chambers praised the efforts of the monarch, Crown Prince Mohammed bin Salman and others in reaching an agreement on the 2020 budget.

The government has predicted revenues of SR833 billion and a deficit of SR187 billion for next year, considered an indicator of the success of the Kingdom’s economic policies amid a bleak global economic backdrop.

Chairman of the Council of Saudi Chambers Dr. Sami Abdullah Al-Abaidi said that the Saudi business sector was optimistic about the new spending plans.

“These figures reflect the effective impact of the economic reform measures, the economy’s restructuring and diversification of sources of income,” he added.

Al-Abaidi praised the king and the crown prince for supporting the Saudi economy through numerous projects and initiatives aimed at boosting the business sector.

He said the most notable were business performance improvement initiatives, privatization, private-sector stimulation and local promotion programs.

“This has paved the way for the Kingdom to get the best international classifications, including its first world ranking in business environment reforms, which made it a hub for investments,” Al-Abaidi added.

The business chief reiterated King Salman’s determination to continue implementing reforms, diversifying sources of income, making optimal use of resources, empowering the private sector, and improving transparency and efficiency in government spending to boost growth rates.

“These trends are one of the most important requirements for achieving the Kingdom’s Vision 2030,” he said.

The council’s vice chairman, Muneer bin Saad, said the budget for the new year focused on investing in the human element and sectors that directly affected the lives of citizens, including the development of services.

Saad added the monarch had directed to extend the disbursement of the cost of living allowance until the end of 2020.

Council member Abdullah Al-Odaim said the budget met the expectations of Saudi citizens, and strengthened the confidence of international investors, as figures showed the determination of the state to move forward in its policies to raise the efficiency of government spending.

They also showed increases in non-oil revenues, projected to grow more in light of the improvement of economic activity.

The delegated secretary-general of the Council of Saudi Chambers, Hussain Al-Abdulqader, said the Saudi business sector welcomed the budget which through
its projects and programs would help improve investment opportunities as well as the Saudi economy, ultimately strengthening the Kingdom’s global economic standing.