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As
if the fallout over the killing of columnist Jamal Khashoggi wasn’t enough,
oil’s decline has helped make Saudi bonds the worst performers among Gulf peers
in the second half of this year. But all this panic has created buying
opportunities.
"There
are times when risks get overpriced," said New York-based Shamaila Khan,
director of developing-nation debt at AllianceBernstein. " We like to take
advantage of that when it happens."
The
nation’s bonds have been roiled by the international outrage over the murder of
Khashoggi at the Saudi consulate in Turkey. Meanwhile, the price of oil, the
kingdom’s main source of income, plummeted into a bear market as the US granted
surprise waivers for sanctioned Iranian crude, spurring the yield on Saudi
Arabia’s $5bn bonds due 2028 to a record last week.
The
kingdom’s five-year credit default swaps jumped 41% this quarter, the most
among 40 contracts tracked by Bloomberg globally, to 96 basis points on Monday,
according to CMA prices.
While
sanctions on Saudi Arabia for now are "too little" to affect the
economy, any escalation would probably cause a further sell-off in its bonds,
said Zeina Rizk, a director of fixed-income asset management at Arqaam Capital
Ltd in Dubai. The Trump administration on Thursday announced sanctions against
17 Saudi officials implicated in Khashoggi’s killing. Some US lawmakers have
demanded tougher action against the kingdom.
"At
this stage the way it can unfold is very uncertain," Rizk said in a
Bloomberg Television interview. The buying opportunity in the kingdom’s bonds
would come once the year-end volatility subsides, she said.
Not just
Saudi
Oman and
Bahrain, which have the weakest finances in the region, have also seen their
bonds decline with crude. The yield on Oman’s 2028 bonds have risen almost
every day this month to 6.6% on Tuesday, near the highest since the notes were
issued this year, and the rate on similar maturity Bahraini securities climbed
for a seventh day on Tuesday.
For Brett
Rowley, the Los Angeles-based managing director for emerging markets at TCW
Group, the short-term outlook for debt in the six-nation Gulf Cooperation
Council is being clouded by oil, and the sell-off could provide an opportunity
to gain "exposure to the energy producers at more attractive levels,"
he said. " A 2014-style collapse is not our base-case scenario."
The
economies of GCC members are set to grow 2.4% this year and 3% in 2019, after
contracting in 2017, the International Monetary Fund said last week.
Most of
the countries in the region are "fairly strong credits" and will be
able to withstand the recent drop in oil, said Khan at AllianceBernstein.
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