GCC Credit Weekly 9 July 2017

In addition to bearish oil prices, four main events that impacted GCC bond markets last week were a) unresolved status of the diplomatic impasse with Qatar; b) update from Dana Gas about rationale for declaring its sukuk unlawful; c) Moody’s downgrade of outlook to negative on its ratings on Qatar sovereign and Qatari banks and d) Fitch’s downgrade of 5 Omani bank’s ratings outlooks to negative.

Moreover, yield curves for major developed market sovereign bonds steepened with yields on shorter dated bonds declining and that on longer dated bonds rising. Yields on 2yr, 5yr, 10yr and 30yr UST closed at 1.40% (-1bp), 1.95% (+2bps), 2.39% (+4bps) and 2.93% (+6bps) respectively. Across the pond, yield on 2yr German Bunds declined to -0.61% (-1bp) while those on 10yr closed 10bps higher at 0.57%.

Against this challenging backdrop for bonds in general, GCC bonds waned as risk of higher than projected budget deficits in the region increased as a consequence of oil prices unhinging from the psychological $50 / b mark. Average option adjusted spreads on Bloomberg Barclays GCC index increased 9bps to 153bps.  In conjunction with higher benchmark yields, total average yield on the index rose 12bps to 3.59% causing most bonds to fall in price.

As is expected post negative rating actions, bonds from Qatar and Oman were the main underperformers during the week. In contrast, shorter dated bonds, including perpetual bonds that have call dates within the next 2 -3 years held up in price and were among the top 10 performers.

Moody’s had downgraded Qatar’s rating to Aa3 in late May, before the eruption of the current crisis, citing concerns about rising debt levels. This was followed by one notch downgrade to AA- by S&P in early June. Concerns about negative impact of the current sanctions and embargos on Qatar’s economy and banking systems is worrying the rating agencies with all three of them having placed their respective ratings (AA-/Aa3/AA) either on negative outlook or negative credit watch. Yield on QATAR 30s increased by 14bps to 4.14% and price fell by more than three points while that on shorter dated QATAR 20s fell by nearly a point and a half. 5yr CDS spread on Qatar increased another 9bps to 125bps and compares unfavorably to even lower rated peers such as Malaysia (rated A) at 89bps or even A- rated Thailand at 64bps. Continued political uncertainty is likely to keep investors at bay in the short term even though Qatar’s foreign assets comfortably outweigh its foreign liabilities and credit rating is likely to remain well in the high grade category.

Fitch affirmed ratings on Bank Muscat (BBB), Ahli Bank (BBB-), Bank Dhofar (BBB-) and Bank Sohar (BBB-), however revised the rating outlook to negative, citing concerns about Oman sovereign’s weakening financial flexibility to support its banking system due to lower oil prices. Fitch noted that the fiscal policy response to the drop in oil prices has not prevented a significant deterioration in public finances. National Bank of Oman’s rating and outlook were affirmed at BBB-/stable as a result of its Viability Rating already being at BBB- which is unlikely to be impacted by a one notch downgrade of the sovereign, if eventuated. Oman 47 was the worst performing security during the week, falling nearly five points in price and 15bps increase in Z-spread to 402bps. 

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