Qatar rift risks raising cost for Gulf debt issuers

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DUBAI/RIYADH June 21, (RTRS): Qatar’s rift with its Arab neighbours is threatening to puncture investor appetite for the Gulf region as a whole, translating into potentially higher debt costs for governments and possibly slowing the pace of Saudi Arabia’s economic reforms. Saudi, United Arab Emirates, Bahrain and Egypt broke relations and transport ties with Qatar on June 5, alleging it finances terrorism, something Doha vehemently denies.

The move has thrown the region — which has been relatively stable, if troubled by Sunni and Shi’ite Muslim rivalry — into diplomatic turmoil that is now putting off investors. “We were used to a relatively peaceful region and now the landscape has changed,” said Brigitte Le Bris, head of emerging debt and currencies at Paris- based Natixis Asset Management, which manages about 350 billion euros ($392 billion) in assets. “We are not yet ready to increase our exposure to the region.

We need to know whether this crisis is isolated to Qatar or it can spread and affect other countries or the crisis can worsen.” One obvious area is sovereign debt, where the crisis has the potential of raising borrowing costs. Following the sanctions, rating agency Standard & Poor’s downgraded Qatar while Fitch put it on its watchlist for a potential downgrade. To date, foreign investors still appear to be comfortable holding Qatar paper due to the size of the country’s reserves and assets held by its sovereign wealth fund, Qatar Investment Authority.

Yields on Qatar’s sovereign dollar bonds maturing in 2026 spiked over 40 basis points after the sanctions were announced on June 5 but have now recovered nearly 20 bps. Other Gulf Cooperation Council countries’ sovereign bonds saw some weakness in the immediate aftermath of the diplomatic crisis, but again have largely gone back to their precrisis levels.

How long this lasts, however, may depend on how long the crisis goes on, which may be “for years” according to one UAE minister. The market’s take, however, is that the diplomatic crisis will be resolved via political mediation, said Max Wolman, senior portfolio manager at Aberdeen Asset Management in London. “But if the likes of Bahrain, Oman or even Saudi Arabia were to issue these days, I think there would be a slight risk premium of 10 to 15 basis points in the primary to the secondary market because of current political uncertainty,” he said.

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