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.