Market Commentary – Risks for Saudi Arabia and Bahrain

• In the latest release dated 30th September, S&P downgraded Saudi Arabia’s foreign currency sovereign credit rating to ‘A+’ from ‘AA-‘. S&P highlights the dramatic plunge in oil prices over the past 18 months has caused a “pronounced negative swing” in Saudi Arabia’s financial position, which prompted the downgrade.
• Separately the IMF has warned most countries in the region (especially Saudi Arabia, Bahrain and Oman) will run out of cash in the next five years or less if oil continues to stay ~USD50/bbl. IMF estimates that low oil prices will wipe-out ~USD360bn from the region this year alone.
• According to the latest report from Bank of America Merrill Lynch (BAML), the increasingly fragile fiscal position of Bahrain amid the significantly low oil prices is likely to prompt a downgrade in its investment grade credit to ‘junk’.
• Bahrain has opted to issue an international bond as opposed to a sukuk in order to bridge a budget deficit gap. The issuance is expected to raise USD2bn.

Recent Bond and Sukuk Issuances

Sukuk Issuance Update

Sukuk issuances in October 2015 stood at USD2.6bn, increasing from USD0.5mn registered in the earlier year during the same period. For YTD October 2015 sukuk issuance by value declined 22%y-o-y to USD16.2bn, mainly driven by a sharp decline in sovereign issuances (-21% y-o-y, worthUSD4.8bn) and quasi-sovereign (-82%y-o-y,USD1.0bn),however partially offset by the increase in corporate issuances (13%y-o-y,USD10.4bn). Corporates comprised 64% of the total issuance value for YTD October 2015, followed by sovereign at 30% and quasi-sovereign issuances at 6%.

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 GCC Market Update October 2015