BofA inverted-Yield report sounds alarm for Saudi, African debt

Bank of America Merrill Lynch Global Research said Saudi Arabia would require the largest adjustment to steady its debt
BofA inverted-Yield report sounds alarm for Saudi, African debt
Saudi Arabia is “still highly vulnerable” to lower oil prices, needing crude at a minimum of $60 to $65 to defend macroeconomic stability, according to Bank of America Merrill Lynch Global Research.
By Bloomberg
Tue 10 Sep 2019 08:30 AM

The yield-curve inversion will bring with it the threat of debt distress across the biggest emerging economies, and saddle Saudi Arabia and South Africa with “particular challenges,” according to Bank of America Merrill Lynch Global Research.

An inverted curve, historically a signal that a recession is looming, will eventually make sustainability of public debt “a more crucial topic” even as the current ultra-low interest rates will likely keep the spotlight off of solvency issues for now, analysts led by David Hauner said in a report on Monday.

The bank’s analysis of eight sovereigns in eastern Europe, the Middle East and Africa found sub-Saharan credits are “most at risk” while Saudi Arabia would require the largest adjustment to steady its debt. BofA focused primarily on commodity exporters, saying its main concern is with a prolonged downturn in global economic growth.

Key Insights

  • Based on a scenario for ratings that envisages Brent crude at $40 a barrel for 2020-2021, Ghana’s spreads would widen the most, rising by about 300 basis points when applying the current rating-spread curve; it would be followed by Angola, Kazakhstan and Nigeria
  • Saudi Arabia is also at risk of “significant further rating downside / spread upside,” while Russia should be “relatively insulated” and could even ease policy with Brent under $40
  • Saudi Arabia is “still highly vulnerable” to lower oil prices, needing crude at a minimum of $60 to $65 to defend macroeconomic stability
  • South Africa already has “high debt” and needs an adjustment of almost 2% of gross domestic product to stabilize this level

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