GCC Credit Weekly

The muddied outlook on the US-China trade talks continued to weigh on investor sentiment last week. Government bonds in the developed world traded in a narrow range. Yield on 2yr US treasuries closed a bp higher at 2.20% while those on 5yr, 10yr and 30yr closed lower by 1bp each to 2.17%, 2.39% and 2.83% respectively. The UST yield curve flattened with 2yr-5yr spread getting deeper in the negative territory at -3bps and the 2yr-10yr spread narrowing 2bps to 19bps now. Market implied probability of rate cuts stand at 75% chance of at least one rate cut and a 25% probability of two rate cuts before the end of this year.

Against this backdrop, GCC bonds had a sell bias. Evolving political developments with the US   increasing deployment of military forces in the Gulf region are making investors cautious. Rating agency Moody’s stated that Qatar, Kuwait and Bahrain will like be significantly affected should Iran follow through on its threat to close off the Strait of Hormuz. 

Average yield on Bloomberg Barclays GCC bond index inched 3bps up to 3.99% mainly as a result of a 10 bps increase in credit spreads to 171 bps during the week. Amid the rising political concerns, demand for credit protection increased. Five-year CDS levels on GCC sovereigns closed the week higher at 60bps (+3bps) for Abu Dhabi, 93bps (+9bps) for Saudi Arabia and 71bps (+7bps) for Qatar.

Bahrain’s plan to tap international markets soon for new bonds created incremental demand for default protection, causing its 5yr CDS level to increase by 22bps to 288bps. Longer dated Bahrain bonds suffered in tandem with yield on BHRAIN 44s increasing 27bps to 6.91% during the week. In contrast, shorter dated Bahrain bonds held ground well. Spread on BHRAIN 21s reduced 35bps to 4.45% as the country disclosed that it will receive about USD 2.3 bn this year under the five-year support package from its neighbors. Bahrain will receive USD 1.761 bn in 2020, USD 1.846 bn in 2021, UAS 1.421 bn in 2022, and USD 650 mn in 2023 under the same package. As per recent government statements, Bahrain forecasts a budget deficit of 4.7% of gross domestic product this year, compared with 6.2% in 2018 and sees the shortfall narrowing to 3.9% in 2020.

Dubai’s main port and biggest free zone authority, the Jebel Ali Free Zone (JAFZA) which is indirectly owned by DP World, announced plans to return 1.3 billion dirhams ($354 million) in cash and bank guarantees to its clients in an effort to stimulate the broader UAE economy. Jafza and DP World Plc are key employers in Dubai, accounting for 16.2% of the emirate’s total workforce and circa 33% of Dubai’s estimated GDP of circa AED 412 billion in 2017. JAFZSK 19s come up for maturity next month and closed the week at a yield of 1.75%.

GCC vs EM IG bonds and US IG bonds - OAS history (%)

Source: Bloomberg, Emirates NBD Research

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