Debt Risk of Gulf’s Richest States Jumps Amid Rush to Sell Bonds

  • Credit-default swaps jump in Saudi Arabia, U.A.E., Qatar
  • Pressure on Gulf budgets to persist over medium term: Citi

Not even a rebound in oil prices can tame credit risk among the Gulf’s richest governments after they flooded the market with bonds.

The average cost of credit-default swaps for Saudi Arabia, Qatar and Abu Dhabi -- all boasting positions in the top five investment-grade rankings -- has surged by a third in less than two months to 137 basis points. While Saudi Arabia has yet to sell bonds, about $960 million worth of contracts are outstanding, the most since Bloomberg started tracking the data in 2011.

Abu Dhabi and Qatar have sold a combined $14 billion of debt since late April, and Saudi Arabia is said to be considering raising at least $10 billion as early as next month. The states, which use energy sales to help fund public spending, are tapping the international debt market after a slump in oil prices put a strain on their finances. While Brent crude has soared more than 70 percent since January to about $50 a barrel, analysts say it’s not enough to ease budgetary pressures.

“The significant increase in issuance from the region’s sovereigns and quasi-sovereign borrowers is the main driver of spreads here,” said Mohammed Elmi, an emerging market money manager at Federated Investors in London who bought into Qatar’s bond sale. In spite of the recent bounce in crude prices, “Gulf Cooperation Council economies are still slowly adjusting to lower oil prices and current spreads reflect this situation,” he said.

The cost to insure Saudi Arabia’s debt against default for five years rose to 190 basis points on Tuesday, the highest level since February. That was about 26 basis points above Hungary and approaching the level of Morocco, both rated junk by Moody’s Investors Service.

Costs Rise

Credit-default swaps for Abu Dhabi and Qatar climbed to 107 and 121 basis points, respectively, the highest levels in more than three months. The amount of outstanding contracts for each exceeds $1 billion, near a record in both cases, data compiled by Bloomberg show.

Still, the bond sales should help ease pressure on regional governments, who have been tapping the reserves they accumulated while oil was about $100 a barrel. Saudi Arabia has already burned through almost a quarter of its cash stockpile since the start of oil’s descent in 2014.

“The challenges that are facing the region are only marginally less acute now than with oil prices at $40,” said Farouk Soussa, the London-based chief Middle East economist at Citigroup Global Markets Ltd. “Oil prices have to move significantly higher to alleviate the fiscal and current-account challenges that these countries are facing. We just don’t see that happening in the medium term."

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