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GCC risk premiums will rise as credit downgrades continue

April 12, 2017 | Dubai

Fisch Asset Management, a global leader in convertible and corporate bond strategies, has said that GCC countries are likely to continue along a path of further credit rating downgrades, following Fitch’s March downgrade of Saudi Arabia’s Issuer Default Rating (IDR) from AA- to A+.

Fisch Asset Management also expects GCC central banks to follow the US Federal Reserve’s latest rate hike, after it increased rates by 25 basis points last month. According to a recent report by Standard Chartered, this ‘could prove worrisome’ in the light of weak growth momentum in the region.

Philipp Good, CEO at Fisch Asset Management, commented:

“From a supply perspective, countries continue to finance their deficits frontloaded in the bond market to fight the liquidity drain. This has led to two key outcomes: MENA issuances have gained in relevance versus other emerging market regions (17% of issuance) and sovereigns are issuing heavily, creating a crowding-out scenario. We are therefore likely to see risk premiums going up after a significant rally, as GCC credit continues to be downgraded. We continue to selectively invest in the region, but have reduced our overweight to a neutral position in the past few months.”

According to MENA debt issuance figures as of March 2017, supply from SSA (Sovereign, Supranationals and Agencies) accounts for over 80% of total supply in the region. This share has increased from 20% in 2013 and underlines the need for capital. In terms of pricing, issuances from other sectors depend heavily on the success of SSA placements.

Commenting on the outlook for GCC economies, Philipp Good added:

“Liquidity in GCC economies is at risk of worsening, and this risk will increase if governments continue to borrow in the domestic markets. As the US dollar continues to strengthen, there is the further risk of capital outflows from the region, with spending power in non-pegged countries increasing. This will, in turn, add to existing pressure on the GCC’s foreign currency reserves.”

In November 2016, Fisch Asset Management announced that compared with the UAE, Qatar and Kuwait, Saudi Arabia faced the greatest economic challenges, but that despite pressure on its credit rating, the Kingdom had retained a number of key strengths. These include its exceptionally large oil reserves and status as the world’s largest producer, meaning that it has traditionally been able to influence supply and pricing in the global market.

Fisch Asset Management has not re-assessed Saudi Arabia’s rating. Their credit quality assessment remains A- and has taken the following aspects already sufficiently into account: sustained deterioration of public and external balance sheets, the considerably wider than expected fiscal deficit for 2016 and the ongoing doubts about the extent to which the government’s ambitious reform programme can be implemented.

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