A downgrade of Saudi Arabia’s sovereign debt by Standard and Poor’s at the weekend may contribute to a gradual repricing of the Persian Gulf Arab states’ international bonds to lower levels as they reflect risks created by low oil prices.
S&P pointed to factors which could undermine bond prices across the Persian Gulf Arab economies in coming months and years: the way in which cheap oil is opening up state budget deficits, and the difficult choices which governments will need to make to bring the deficits under control.
Persian Gulf Arab bond yields have risen since oil plunged last year, but for some investors, they still reflect an era when state treasuries were overflowing with fresh infusions of oil money, banks were flush with cash and economies were growing strongly.
All of those conditions have now disappeared to a significant degree, but that may not yet be fully reflected in secondary market bond prices.
An April 2023 sukuk from state-owned utility Saudi Electric, for example, is trading at 3.31%, well inside a May 2023 bond from Chinese state oil firm CNOOC , which is at 3.80%. CNOOC is rated Aa3 by Moody’s and Saudi Electric has an equivalent rating from Fitch.
Change for the Worse
US dollar sukuk issues last month by Saudi Arabia’s Arab Petroleum Investments Corp, Qatar Islamic Bank and Dubai’s Majid Al Futtaim drew only modest interest from international investors.
Middle East investors took about 80% of the Apicorp issue, 68% of QIB issue and 42% of MAF deal. The ratios in the first two cases were much higher than levels being seen just six months or a year ago.
To some fund managers, that indicates the structure of the investor base has changed for the worse, and that it is only local investors who are now keeping prices up.
“A relative lack of new issuance, combined with a market dominated by buy-and-hold investors, means that we have probably not widened as much as we should have given the changing risk profile in the region,” said Abdul Kadir Hussain, who oversees about $1.2 billion in assets as chief executive of Dubai’s Mashreq Capital.
S&P cut its rating of Saudi Arabia’s long-term foreign and local currency ratings by one notch to ‘A-plus/A-1’, keeping a negative outlook.
The other two major agencies have higher ratings for the country–Moody’s is one notch higher with a stable outlook, while Fitch is two notches higher with a negative outlook–and it is not clear that they will imitate S&P.
The Saudi Finance Ministry said the downgrade was unjustified and terminated its rating agreement with S&P, forcing the agency to classify its assessment of the country as “unsolicited”.
