Persian Gulf debt market weakens as rift with Qatar worries foreign investors

EghetsadOnline: Bond prices across Persian Gulf Arab nations weakened on Tuesday as foreign investors hesitated to buy, concerned that the diplomatic crisis surrounding Qatar would increase risks around the region.

News ID: ۷۷۶۷۹۸

06 June 2017

Qatar's sovereign international bonds came under pressure, with its longest-dated paper – a bond maturing in 2046 74727PAV3= – registering the largest losses. It is now down by more than 2 cents on the dollar since the end of last week.

But, according to Reuters, bond prices fell moderately across the six-nation Gulf Cooperation Council, said a Dubai-based portfolio manager, after Saudi Arabia, Egypt, the United Arab Emirates and Bahrain severed diplomatic and transport ties with Doha early on Monday, accusing it of supporting terrorism.

The GCC debt market has seen a surge in foreign investment over the past year because of a surge in issuance by governments, which has improved liquidity and created a benchmark yield curve.

But the Qatari crisis, the most serious threat to the existence of the GCC in years, has made some foreign institutions more cautious about the region in general, at least until they see whether the dispute can be resolved without any further escalation, fund managers said.

Also, the Saudi Arabian, UAE and Bahraini central banks have not yet clarified how they want commercial banks in their countries to handle business ties with Qatar, which involve substantial cross-border lending, deposits and syndicated loans.

If the commercial banks are advised to get rid of their Qatari assets in a short timeframe, or if authorities act against Qatari banking assets in their jurisdictions, that could provoke retaliation by Doha and turmoil in the Gulf banking and money markets.

"There hasn't been a panic sell-off so far and the market is still seeing a two-way flow skewed toward better sellers," said Zeina Rizq, director of fixed income asset management at Arqaam Capital in Dubai.

"But things could change pretty drastically if the situation escalates or if the regional central banks ask commercial banks to sell their Qatari paper.”

A senior banker at a foreign bank in Dubai said banks in the UAE had not yet been informed by the UAE central bank about what would happen to their branches and operations in Qatar.

"Will a UAE bank lend to a Qatari bank that operates in Dubai or Abu Dhabi, or will it be switched out of the system? There is absolutely no clarity on this. Is this just cutting off diplomatic ties, or leading to economic sanctions against Qatari banks and companies?”

Selling of GCC sovereign and corporate bonds was particularly strong on Tuesday at the long end of the yield curve, where more international investors are involved.

Saudi Arabia’s bonds maturing in 2046 SA150867550= have lost a little more than 0.5 cent on the dollar since last week. Its 10-year bonds due in 2026 SA150867541= have dropped almost as much.

Oman’s 2047 bonds OM157596802= were also weaker on Tuesday, down by a little more than 1 cent since last week.

"If tensions remain high, the Qatar sovereign is likely to underperform its GCC peers, with the 30-year part of the curve impacted the most due to its high international ownership,” Standard Chartered said in a research report.

Qatar Islamic Bank's QISB.QA latest $750 million sukuk issue XS161421219=TE has now dropped by about 2-1/2 cents, while Qatari property developer Ezdan Holding's ERES.QA 2022 sukuk issue XS159080650=TE has sunk 4.5 cents to a bid price of 95.7 cents, according to Tradeweb data.

Some further downward pressure was caused by news that many UAE banks have stopped providing leverage to their clients to buy Qatari bonds, said Rizk. This means high net worth buyers could vanish from the market, banking sources told Reuters.