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Too battered to fail: Bonds in the Gulf are a safe place to hide

Sovereign bonds in the six-nation Gulf Cooperation Council (GCC) are now attractive compared with similarly rated peers

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"While geopolitics have consistently been an important input for investing in the Middle East, our biggest concern now is the uncertainty surrounding US foreign policy." - Brett Rowley, managing director for emerging markets at TCW

Dubai

INVESTORS' appetite for risk is back, but most of the issues that soured the mood across emerging markets last week are a tweet away from flaring up again. When that happens, the Gulf's beleaguered bonds will offer refuge.

Blighted by political risks in the region, a flood of debt sales and finances that haven't recovered fully from the crash in oil prices, sovereign bonds in the six-nation Gulf Cooperation Council (GCC) are now attractive compared with similarly rated peers.

"Although Middle East sovereign issuers remain vulnerable to headline risk, there is already a considerable geopolitical risk premium baked into their asset prices," said Brett Rowley, the Los Angeles-based managing director for emerging markets at TCW, which manages about US$200 billion.

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While crude prices are nowhere near 2014 levels, they have risen, which has improved sentiment toward debt in the GCC, especially given the economic reforms countries such as Saudi Arabia have implemented, according to TCW Group Inc and Franklin Templeton Investments.

Gulf bonds offer "excellent value" compared with other similarly rated emerging-market debt, according to Arqaam Capital. The risk premium on Saudi Arabia and Qatar is too high, said Abdul Kadir Hussain, the head of fixed income at the Dubai-based firm.

Saudi Arabia's bonds maturing in 2047 yielded 5.07 per cent, compared with 4.78 per cent for a similar security from Indonesia - even though the kingdom is rated four levels higher by Moody's Investors Service. Qatar's debt due in 2028 yielded 4.45 per cent, almost 30 basis points more than similar maturity bonds from Mexico, rated three rungs lower Bahrain; Oman has the weakest finances in the GCC and faces "specific negative credit trends," but its bonds are still cheap compared with those of their peers, Mr Hussain said.

Yields on Bahrain's debt are similar to those issued by lower-rated countries such as Ghana, Ethiopia and Gabon. Oman trades at similar levels to Turkey, which is vulnerable to foreign-exchange volatility and political uncertainty, he said.

"In times of excessive volatility, the Middle East would probably be a better place to hide," Mr Hussain said.

The region's debt market is dominated by buy-and-hold investors, so it tends to be slightly less volatile during any major selloff, despite recent bond offerings and liquidity now lower than it was when oil was at US$100 a barrel, he said.

The risk that bond prices would fall due to new issues has eased after Saudi Arabia, the biggest borrower in the region, and Qatar sold a combined US$23 billion of bonds last week, Mr Hussain said. The spread on Gulf bonds widened to 227 basis points over Treasuries on Tuesday, the highest since November 2016, according to a JPMorgan Chase & Co gauge.

Qatar made its first foray into the international debt market since a group of Arab nations, led by Saudi Arabia, began a punitive boycott of the gas-rich Gulf country on charges of terror finances, which Qatar denies. The bond sales by Qatar and Saudi Arabia attracted more than US$100 billion in orders combined, even though they were priced just before a US led-strike in Syria over the weekend.

"While geopolitics has consistently been an important input for investing in the Middle East, our biggest concern now is the uncertainty surrounding US foreign policy," said TCW's Mr Rowley. "We remain concerned about potential miscalculations by various actors in the region."

Oil prices have climbed on speculation that sanctions on Iran will be re-imposed after US President Donald Trump appointed policy hawks John Bolton and Mike Pompeo as National Security Advisor and Secretary of State, respectively.

Still, the worst is probably over for the Gulf region as fiscal consolidation, structural reforms and introduction of taxation start to bear fruit, said Mohieddine Kronfol, the Dubai-based chief investment officer for global sukuk, Middle East and North Africa fixed income at Franklin Templeton Investments. The bulk of the rating downgrades have passed for most of the countries, he said.

"We have been defensive for the better part of the last 12 months or so," Mr Kronfol said. "We feel that GCC fixed income is coming out of three relatively challenging years." BLOOMBERG

 

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