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UNITED ARAB EMIRATES: UAE bonds prove to be safe haven amid Iran tensions.


Added on 28/06/2019

As extracted from gulfnews.com, published on Thursday 27th July, 2019.

 

Amid heightened tensions over Iran after the oil tanker attacks, UAE credit spreads have widened the least in the region, proving it to be a safe haven.

UAE credit spreads for a long duration bonds has widened by 5 basis points since May, while credit spreads for long duration Saudi Arabia’s bonds have widened by 30 basis points since last month. Credit spreads of Omani bonds have widened the most by 90 basis points, and that of Bahrain bonds have widened by 60 basis points.

Regional tensions have been flaring up since May after reports of sabotages of oil tankers off the coast of Fujairah and a drone attack on pipeline of Saudi Aramco. Earlier in the month, two oil tankers were attacked by Iran off the Gulf of Oman. Heightened geo-politics generally cause spread widening, indicating the ability to government to service their debt.

“Oman and Bahrain spreads widened the most but that was due to supply expectations. The Fed’s dovish stance supporting interest rate cuts, the US-China trade war, the ECB and Japan supporting further monetary policy easing and weaker global economic data in combination with oil prices holding up have retained demand for high-grade GCC bonds,” Chandru Bhatia, Senior Portfolio Manager Fixed Income at Emirates NBD Asset Management, told Gulf News.

Oman has been a laggard in performance of credit spreads. The country has been slow in implementing reforms to plug the budget deficit. Just last week, Oman implemented a sin tax on carbonated, energy drinks, and tobacco, and would be levying value added tax by September 1.

“The market perfection is that they are not doing any reforms, and that is causing frustration in the market. Once they start doing roadshows, markets would question them,” said a fund manager who did not wished to be named. Earlier reports have indicated Oman was planning to come up with a dollar bond issue, but has yet to see the light of the day.

“New issuance has restarted after Ramadan, but I think major sovereign issuers like Oman may wait for some positive signals on the geopolitical front before they come to market,” Abdul Kadir Hussain, Managing Director, Fixed Income Asset Management at Arqaam Capital told Gulf News

“The region has so far moved in line with global EM, but underperformed slightly. So in my view there has been some impact but maybe not as significant as one might have expected. I think the primary reasons for this is: the action has so far been limited to sanctions and tweets, things which the market has become a bit immune to,” Hussain said. The credit spreads on the GCC index was placed at 232 basis points, compared to 181 basis points for emerging markets bond index.