Persian Gulf bonds are beating emerging-market debt this year as increasing revenue from oil exports help the region withstand global financial-market turmoil better than most developing nations.
Dollar notes from the Gulf Cooperation Council have returned 6 percent in 2011, according the HSBC/NASDAQ Dubai GCC US Dollar Sukuk/Bond Index. Emerging-market securities worldwide gained 3.2 percent, JPMorgan Chase & Co. data show. The average cost of insuring Middle East’s sovereign debt rose 104 basis points this year to 305 on Sept. 23, trailing similar measures that jumped 132 to 276 in the Asia-Pacific region, according to data provider CMA.
Crude prices averaging about 23 percent more this year than a year earlier, according to Bloomberg data, will help economies of the Middle East and North Africa expand faster, the World Bank said last week. It raised its 2011 growth estimate for the region to 4.1 percent from 3.6 percent. Members of the Organization of Petroleum Exporting Countries, led by Saudi Arabia and the United Arab Emirates, will earn a record $1 trillion this year, according to the U.S. Energy Department.
“Higher oil prices in the first half have boosted investor confidence and re-allocations from more troubled parts of the region have helped increase liquidity in the local banking sector,” Alia Moubayed, London-based head of research for the Middle East and North Africa at Barclays Capital, said in a telephone interview on Sept. 22.
The International Monetary Fund Sept. 20 cut its forecast for global growth to 4 percent this year and predicted “severe” repercussions if Europe fails to contain its debt crisis or U.S. policy makers deadlock over a fiscal plan. Global stocks entered their first bear market in two years last week on concern Greek insolvency is inevitable and Europe can’t prevent the damage.
Persian Gulf economies are bucking the trend. The outlook for Saudi Arabia’s economy is “favorable” as the kingdom benefits from additional government spending and increased oil revenue, the IMF said in a review Aug. 23. Gross domestic product will increase 6.5 percent this year after expanding 4.1 percent in 2010, it said. In the U.A.E., GDP may rise 3.3 percent this year after 3.2 percent in 2010, IMF said.
“There’s an increased propensity for regional governments to invest locally after the events of 2008 and given global concerns,” Emad Mostaque, a London-based Middle East and North Africa strategist at Religare Capital Markets Plc, said by e- mail. “With oil above $100 per barrel, this is a significant level of inflow versus a comparatively small market.”
OPEC’s basket of crudes, a weighted average of the group’s main export grades, has been trading above $100 since Feb. 21. WTI crude prices averaged $98 a barrel in the first half of this year compared with $78 a year. The six-member Gulf Cooperation Council holds about one-fifth of the world’s proven oil reserves.
Many Persian Gulf states are promising to plow this oil revenue into public and social programs after pro-democracy movements overthrew rulers in Tunisia, Egypt and Libya and sparked violent protest in Yemen and Syria.
Saudi Arabia, the world’s largest oil exporter, announced plans in February and March to spend about $129 billion to avoid similar protests. Kuwaitis received 1,000 dinars ($3,664) and free food for 13 months, state news agency reported in January. Earlier this month, Qatar’s crown prince Sheikh Tamim bin Hamad Al Thani ordered 30 billion riyals ($8.2 billion) in civil servant salary increases and pension-fund allowances.
Dubai’s credit risk has dropped over the past two years as debt restructuring deals, bond repayments and profitability at companies boost confidence in the emirate’s economic rebound. The second-biggest of seven sheikhdoms that make up the U.A.E., Dubai is also benefiting from a stable government as political upheaval sweeps other parts of the Middle East.
“Emerging market bonds, particularly local currency, have had an exceptional two years whereas GCC bonds lagged due to the Dubai default at the end of 2009,” said Mostaque. “Dubai is now miraculously credit-worthy once more with its recent $500 million issue, adding confidence to the GCC market.”
Bonds of Qatar and Abu Dhabi have outperformed notes from other emerging economies. The yield on Qatar’s 4 percent bond maturing in January 2015, the security with the highest weighting on the HSBC/NASDAQ Dubai Index, rose 20 basis points this month to 2.35 percent today. The rate on Abu Dhabi’s 6.75 percent bond maturing April 2019 gained 17 basis points in the period to 3.59 percent.
“Enhanced local-banking-sector liquidity in the politically stable GCC countries has also anchored spreads during periods of turmoil in global markets,” Moubayed said.
Banks in the GCC countries, excluding Bahrain, have had “substantial deposit inflows” from outside the region this year amid political unrest, Victor Lohle, an analyst at Standard Chartered Plc, said in a report in July. Saudi Arabia and the U.A.E., the GCC’s two largest economies, had the biggest gains, according to the report.
“We expect these favorable factors for bonds in the GCC to continue for some time, but the region isn’t immune to what’s happening globally,” said Moubayed. “For the rest of the year, one key risk is how the European debt crisis unfolds. Unless a credible solution is found there could be a sharp deterioration in investor sentiment.”
European policy makers faced mounting pressure from foreign counterparts and investors to step up efforts to prevent their sovereign debt crisis from further roiling the world’s financial markets and economy. The Stoxx 600 tumbled 6.1 percent last week and oil for November delivery lost 9.2 percent to $79.85 a barrel in New York.
The yield on Dubai’s 5.591 percent dollar-denominated bond due June 2021 rose 36 basis points to 6.2 percent on Sept. 23, according to data compiled by Bloomberg. The yield has risen 51 basis points so far this month after falling to 5.28 percent on Aug. 4., the lowest since the bond was issued in June.
The cost to insure Dubai’s debt against default jumped 18 basis points to 512 basis points today, the highest level this year, after hitting a year-low of 317 on June 7, according to five-year credit default swaps from data provider CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in the privately negotiated market.
The contracts pay the buyer face value in exchange for the underlying securities or the cash equivalent, should a government or company fail to adhere to its debt agreements.
“We would have to see oil prices down below $80 to have an impact on regional confidence,” said Religare’s Mostaque. “As a travel hub if global conditions worsen significantly, question marks will be raised over a number of issues cash flow once more without oil to back it up.”
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