Gulf outperforms as world markets slide
Dubai, June 7, 2012
Bonds in the Gulf Arab oil exporters are outperforming fixed income markets in many other countries as the world's economic climate darkens, suggesting the Gulf may have turned a corner in convincing investors of its financial stability.
Gulf bonds were hit hard between 2009 and 2011 when the initial stages of the global financial crisis burst credit and real estate bubbles in the region.
Now the Gulf is threatened by another wave of the crisis - weak US and Chinese economic data and Europe's debt problems dragged Brent crude oil as low as $95 a barrel this week, the lowest since January 2011, from around $125 early this year. In a region where energy exports are some 30 to 50 per cent of nations' gross domestic product, which will have a major impact.
So far, however, bonds in the Gulf have held up well - surprisingly well, in the view of some experts. Spreads on the HSBC-Nasdaq index of conventional bonds in GCC countries have widened only moderately to 301 basis points on June 1, when the last reading was taken. That is a rise of 7 per cent since April 2.
It is a better performance than many bond indexes elsewhere in the world. Spreads on the iTraxx Asia ex-Japan index for investment grade bonds have risen to 206 bps between the start of April and June 5, a climb of over 32 per cent. Spreads on the iTraxx Europe Crossover index, composed 50 companies rated at the very bottom of the investment-grade category or in "junk" territory, widened to 731 bps on June 1, up over 20 per cent.
Some of the Gulf's strongest credits have barely moved during the global volatility. Qatar's $2 billion, 3.125 per cent sovereign bond maturing in 2017 was yielding 2.46 per cent on Wednesday, tighter by 67 bps since issue in December and only 13 bps wider than the yield's record low in early May.
Weaker Gulf credits have also done well. Dubai is still working through its corporate debt problems, and its credit default swaps are in a higher bracket than those of wealthy Qatar, Abu Dhabi and Saudi Arabia.
But Dubai's $600 million, 4.9 per cent sovereign sukuk , maturing in 2017 and issued last month, offered a yield of 4.44 per cent on Wednesday. If Dubai were rated, it would be a minimum BBB, analysts believe. By comparison, Indonesia's $1 billion, 6.875 per cent bond maturing in 2017, rated BBB, is yielding 3.37 per cent.
Brazil's $2.5 billion, 6 percent bond maturing in the same year, rated BBB, yields 2.08 per cent.
One reason for the Gulf's good performance is the region's large pool of unused investment money. Last year's strong economic growth - Saudi Arabia grew 6.8 per cent and the United Arab Emirates, 4.2 per cent - built up wealth which, because of the global crisis, has had few attractive investment channels available to it.
"The sheer weight of money waiting to be deployed in the region has meant that investors are currently trading with a 'buy on weakness' stance" in Gulf bonds, said Mark Watts, head of fixed income at the asset management group of National Bank of Abu Dhabi.
During past waves of the global crisis, Gulf bonds were hit by "forced selling" as desperate European and other foreign investors, suffering in their home markets, sold assets in the Gulf to raise money. This time, there appears to be less forced selling, perhaps because the most desperate investors have already pulled out their money.
But another factor is also supporting the Gulf: a sense that despite continued risks, the region is succeeding in working through its corporate debt problems, and that while bank loan creditors may suffer in restructuring deals, governments will act as needed to make sure public bonds are repaid in full.
In Dubai, for example, a looming $1.25 billion sukuk repayment by DIFC Investments and a $2 billion bond maturity at Jebel Ali Free Zone have been seen as this year's biggest tests of the emirate's corporate creditworthiness. In the last few months both state-owned companies have announced plans to raise money to meet those maturities.
Similarly, Saudi Arabian property developer Dar Al Arkan has been seen as a danger spot in the credit universe, but the yield on its 2015 sukuk sank to a new low of 9.69 per cent this week from 14 per cent at the start of this year as prospects for the company have appeared to improve.
In late May state-owned petrochemicals giant Saudi Basic Industries Corporation said it was buying part of a residential project from Dar for 742 million riyals ($198 million). This will help Dar obtain funds to meet a $1 billion sukuk redemption in July.
Not everyone is convinced that Gulf bonds can continue outperforming so comfortably. At present, oil prices are still high enough for all six GCC countries except Bahrain to keep their state budgets in surplus. This will start to change if oil continues dropping to around $80 - then markets could begin to get nervous about state finances, even though most governments have enough reserves to run budget deficits for many years.
"If the euro zone debt crisis escalates, there will inevitably be an impact on GCC markets," said Biswajit Dasgupta, head of treasury and trading at Invest AD in Abu Dhabi.
"So far, our markets have been supported by several factors - relatively better yields compared to ratings, banks with high liquidity and reasonably strong capitalisation but low credit growth, Islamic investors looking for assets.”
"But if risk aversion increases sharply then the demand will start to fall away."
Watts at National Bank of Abu Dhabi also said that if the cumulative weight of bad news about the global economy became too great, buyers for Gulf bonds would evaporate and prices would be marked down.
"I believe that the GCC credit market is vulnerable to this over the coming weeks and have positioned accordingly," he said.
For now, however, investors seem fairly confident. During the last bout of Gulf market jitters in mid-2011, sukuk outperformed conventional bonds because Islamic instruments were seen as less vulnerable to speculation and were believed to attract a more committed investor base than conventional debt.
This time, however, sukuk have been slightly underperforming conventional bonds in the Gulf. The spread on the HSBC-Nasdaq sukuk index, which includes sukuk globally, widened to 268 bps on June 1, up 12 per cent since April 2. – Reuters