Middle East: The Gulf States’ Credit Markets Are Rebounding (BNO, MES, GULF)

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September 20, 2011 6:12pm NASDAQ:GULF NYSE:BNO

Tony Daltorio: The credit markets in the oil-rich Persian Gulf states have successfully weathered market storms in recent weeks, and the Arab Spring of revolutionary movements.


The yields on AA- rated sovereign bonds from Abu Dhabi and Qatar  — the world’s fastest growing economy with GDP growth of almost 20% — are close to their lows of the year. The bonds are benefiting from low U.S. interest rates, since most regional bonds are denominated in dollars.

Gulf sovereign bonds are also benefiting from a flight away from Europe and the emerging markets of Eastern Europe. said Sergey Dergachev, who oversees $8.5 billion in emerging debt at Union Investment Privatfonds in Germany.

“I have started … to reduce my exposure to Eastern European countries’ and buy into fundamentally strong countries with solid public finances” such as Qatar and Abu Dhabi bonds, he said.

The average yield on Persian Gulf region bonds in August was 4.72%, a rate still attractive to fixed income investors, who must consider rates as low as 2% or less from central banks in Europe and the U.S.

The relative health of the region can be seen in the credit default swaps market. Credit default swaps for countries in the region remain well below the highs they hit in March when the Arab Spring was a front-page story.

The combined surplus of the countries of the Gulf Cooperation Council – Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates – is expected to more than double this year to $292 billion, according to the Institute of International Finance.

The region is also recovering from the 2008 collapse of the Dubai real estate market, which threatened many international and regional banks with $25 billion in losses. The government of Dubai signed agreements with creditors over the debt in March.

The total loan-to-deposit ratio for banks in Qatar and the United Arab Emirates have fallen to less than 100%. The banking sector in the UAE is also much less dependent on financing from abroad than it was three years ago. The banks’ net borrowing from foreign banks now stands at only 1% of total assets, down from 8% three years ago.

There are currently no pure plays for American investors on Gulf region bonds. However, one can track those countries with two exchange traded funds: the Market Vectors Gulf States ETF (NYSE:MES) and the WisdomTree Middle East Dividend Fund (NYSE:GULF).

Of course, it’s not all blue skies for Gulf countries’ bonds. The rally may falter if oil prices slide. Investors can follow the path of oil through the ETF United States Brent Oil Fund (NYSE:BNO).

Written By Tony Daltorio For Emerging Money

Emerging Money provides insightful and timely information about the increasingly important world of Emerging Market investments. CNBC Emerging Markets Contributor Tim Seymour leads the team of Emerging Money to bring you cutting edge global news and analysis.


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