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Mon 3 Oct 2016 02:07 PM

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GCC countries said to risk further downgrades over growing deficits

New research shows 'clear slowdown' across GCC money markets, with softening prices resulting from economic uncertainty

GCC countries said to risk further downgrades over growing deficits

Growing budget deficits will see GCC countries lever up and risk further credit rating downgrades, according to a new report.

Research by Fisch Asset Management, a credit analysis and convertible bond specialist, shows a "clear slowdown" across GCC money markets, with softening prices resulting from continued macro-economic uncertainty.

Fisch’s market trend indicator for pricing from mid-August to late-September showed a decline in performance in Abu Dhabi equities, Dubai corporate bonds and equities, Kuwait corporate bonds and equities and Saudi Arabian equities.

The report comes after Saudi Arabia, Oman and Bahrain have all suffered ratings downgrades since 2015. Meanwhile, Qatar and Bahrain have shown greater resilience.

Philipp Good, head of Portfolio Management at Fisch Asset Management, said: “It’s true that the GCC debt market still looks good compared to negative yields in developed markets, but regional credits have had a substantial rally with the huge overhang of new issuances that we’ve been waiting to see before the year-end.

"We think there will probably be some re-pricing. Global debt markets are uncertain at the moment, in part due to the US election, the Italian referendum and the problems experienced by Deutsche Bank. While bond yields in the GCC still look attractive compared with other markets, investors need to believe in issuers – for example, the reforms scheduled for the Saudi economy.

"Bonds ultimately need buyers, and that means the market needs to be in the right shape – not just the pricing. In our view, momentum has peaked, so our strategy for the GCC is defensive.”

With oil prices remaining relatively low, Fisch said GCC deficits are expected to grow, with sovereigns and corporates likely to lever up, leading to further rating downgrades.

While the pipeline for new issuances for the end of the year is valued at around $50 billion, most global debt investors will continue to take a cautious approach to GCC issuers, Fisch added.

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