Saudi bond index inclusion paves way for $30bn regional windfall

The Kingdom is to be included in JP Morgan’s emerging market government bond indexes next year after reforms to reduce dependence on oil revenues. (Reuters)
Updated 27 September 2018

Saudi bond index inclusion paves way for $30bn regional windfall

  • Inclusion in the indexes helps to reduce borrowing costs and opens up Saudi Arabia to a much bigger pool of debt investors
  • A similar trend is also under way in equities with the Kingdom’s recent inclusion in the MSCI Emerging Markets Index

LONDON: Saudi Arabia is set to be included in JP Morgan’s emerging market government bond indexes next year, potentially unlocking billions of dollars in fresh investment.
It comes at a key time for the Kingdom’s emerging capital markets as both the government and companies increasingly consider bond sales to raise capital, encouraged by financial reforms that are aimed at reducing economic reliance on oil revenues.
Inclusion in the indexes helps to reduce borrowing costs and opens up Saudi Arabia to a much bigger pool of debt investors.
A similar trend is also under way in equities with the Kingdom’s recent inclusion in the MSCI Emerging Markets Index.
The UAE, Bahrain, Kuwait and Qatar will also become eligible for EMBI Global Diversified (EMBIGD), EMBI Global (EMBIG) and EURO-EMBIG indexes, Reuters reported on Wednesday. The process will be phased between Jan. 31 and Sept. 30, 2019.
That could lead to an estimated $30 billion in inflows, leading to tighter spreads and making primary market access easier, according to Bank of America Merrill Lynch.
Bahrain could emerge as the biggest beneficiary from EMBI inclusion.

 

“This will provide not only large flows as a percentage of debt outstanding, but is also likely to be crucial for future external financing needs,” BoAML said in a note in August.
“One of the clear benefits of being a member of a major benchmark is that investors generally have at least some exposure to each country (particularly if it is reasonably large like Bahrain) to avoid deviating too much from the benchmark.”
Saudi Arabia, Bahrain, Kuwait, Oman and Qatar have issued a quarter of all new debt sold by emerging market countries in each of the past three years, according to Reuters data.
Gulf sovereign bonds rose on the news on Wednesday.
The collapse of oil prices in 2014 as well as regional economic reform initiatives have encouraged Gulf states to turn to debt markets to fund spending that in the past may have been paid for with oil sales.
“GCC index inclusion is a timely recognition of the fact that issuance from the region represents over
15 percent of the stock of emerging market debt, and provides important diversification benefits,” said Mohieddine Kronfol, chief investment officer of Global Sukuk and MENA Fixed Income at Franklin Templeton Investments.
The moves comes as Saudi corporate borrowers such as Saudi Basic Industries Corp. (SABIC) and Saudi Electricity tap debt markets to raise funds.
SABIC is preparing to offer a dollar-denominated unsecured bond to the global market with investor meetings this week.
The Kingdom’s petrochemical giant will be meeting investors in London, New York, Los Angeles and Boston, according to a filing on the Saudi stock exchange on Tuesday.

FASTFACTS

Saudi Arabia, Bahrain, Kuwait, Oman and Qatar have issued a quarter of all new debt sold by emerging market countries over the last three years, according to Reuters data.


Big oil feels the heat on climate as industry leader promises: ‘We will be different’

Updated 22 January 2020

Big oil feels the heat on climate as industry leader promises: ‘We will be different’

  • Trump singles out ‘prophets of doom’ for attack
  • Greenpeace told the Davos gathering that the world’s largest banks, funds and insurance companies had invested $1.4 trillion in fossil fuel companies since the Paris climate deal

LONDON: Teenage environmental activist Greta Thunberg slammed inaction over climate change as the global oil industry found itself under intense scrutiny on the opening day of the World Economic Forum in Davos.

The teenage campaigner went head to head with US President Donald Trump, who dismissed climate “prophets of doom” in his speech.
She in turn shrugged off the US president’s pledge to join the economic forum’s initiative to plant 1 trillion trees to help capture carbon dioxide.
“Planting trees is good, of course, but it’s nowhere near enough,” Thunberg said. “It cannot replace mitigation. We need to start listening to the science and treat this crisis with the importance it deserves,” the 17-year-old said.
The 50th meeting of the World Economic Forum was dominated by the global threat posed by climate change and the carbon economy.
The environmental focus of Davos 2020 caps a year when carbon emissions from fossil fuels hit a record high, and the devastating effects of bushfires in Australia and other climate disasters dominated the news.
Oil company executives from the Gulf and elsewhere are in the spotlight at this year’s Davos meeting as they come under increased pressure to demonstrate how they are reducing their carbon footprint.
“We are not only fighting for our industry’s life but fighting for people to understand the things that we are doing,” said Vicki Hollub, CEO of Occidental, the US-based oil giant with extensive oil operations in the Gulf. “As an industry when we could be different — we will be different.”

‘Planting trees is good, but nowhere near enough,’ activist Greta Thunberg told Davos. (Shutterstock)

She said the company was getting close to being able to sequester significant volumes of CO2 in the US Permian Basin, the heartland of the American shale oil industry which is increasingly in competition with the conventional oil producers of the Arabian Gulf.
“The Permian Basin has the capacity to store 150 gigatons of CO2. That would be 28 years of emissions in the US. That’s the prize for us and that’s the opportunity. People say if you’re sequestering in an oil reservoir then you are producing more oil, but the reality is that it takes more CO2 to inject into a reservoir than the barrel of oil that it makes come out,” Hollub said.
The challenge Occidental and other oil companies face is to make investors understand what is happening in this area of carbon sequesteration, she added.
The investment community at Davos is also looking hard at the oil industry in the face of mounting investor concerns.
Greenpeace told the Davos gathering that the world’s largest banks, funds and insurance companies had invested $1.4 trillion in fossil fuel companies since the Paris climate deal. It accused some of these groups of failing to live up to the World Economic Forum goal of “improving the state of the world.”