GCC bonds hold up amid wider EM sell off

Emerging market bonds sold off last week amid turbulent financial markets more generally. Uncertainty on the US government’s new tariff policies—with stringent tariffs imposed on Canada and Mexico early in the week and then eased substantially by the end of the week—have kept equity and corporate bond markets in the lurch. Emerging market USD-denominated bonds dropped 0.3% last week, cutting their year-to-date gains to 2.4%.

GCC bonds managed to outperform their emerging market peers though only by managing to hold flat last week. Regional sovereign bonds turned lower last week—down 0.2%—while corporate bonds and sukuk managed modest gains. Kuwait was the standout at a country level with Bloomberg’s index of its bonds up 0.3% last week while the UAE, Saudi Arabia and Qatar were flat or marginally negative.

Turkish and Egyptian USD-denominated bonds were weaker last week with drops of 0.3% and 1.6% respectively in their bond indexes.

Regional PMIs have shown some good performance since the start of the year, reflecting good pipelines of project work, resilient consumption and an improving balance of payments position in Egypt’s case. However, MENAT credit markets won’t be isolated from volatility in markets more generally and bonds may suffer if investors take more of a risk-off approach and seek haven assets. The slide in oil prices that has gathered pace since the start of the year will likely raise some anxiety over fiscal sustainability as oil prices in the mid USD 60/b to low USD 70/b range implies fiscal deficits across most of the GCC economies.

For now credit spreads remain relatively stable across GCC bonds even as there has been a widening in broader EM spreads. While near term fiscal pressures will require more borrowing from sovereigns, market access remains strong and backed by still considerable reserves.

The UAE’s economy expanded by 3.8% in the first nine months of 2024, reaching a total of AED 1.32trn. The non-oil economy expanded by 4.5% during the period while we estimate the oil sector expanded by more than 1%. On an annual basis, we estimate the economy expanded by 3.9% in Q3 compared with the same period a year earlier with the non-oil sector expanding by 4.6%. Based on activity data for Q4 2024 it would appear that there was an acceleration in activity in the final months of the year, supporting our estimate of strong non-oil activity in 2024.

The Turkish central bank cut its one-week repo rate by 250bps last week, taking the benchmark rate down to 42.50%, the lowest since December 2023. Slowing inflation (39.1% y/y in February, down from a recent peak of 75.5% in May last year) has given the TCMB room to ease off from the record high of 50.00% at which rates were held through much of 2024, with a cumulative 750bps of cuts so far and more anticipated. The bank’s statement drew attention to improving inflation expectations and anticipated that ‘increased coordination of fiscal policy will also contribute’ to the disinflation.

Fitch affirmed their ‘AA-‘ rating on Kuwait with a stable outlook while S&P affirmed their ‘BB-‘ rating on Jordan, also with a stable outlook.

Selected new issuances in the last week include:

• Ras Al Khaimah sovereign issued a USD 1bn 10yr sukuk at T+80

• Saudi National Bank priced a USD 750m FRN Formosa at SOFR+120

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