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EMTA Special Seminar on the MENA/GCC Markets (London) - Feb. 5

Tuesday, February 5, 2019 

Sponsored by   marketaxess latest 031418 

In Partnership with   GBSA 2018 

International Institute for Strategic Studies
6 Temple Place
London WC2R 2PG 

3:30 p.m. Registration  

4:00 p.m. Panel Discussion 

Current Prospects for the MENA/GCC Bond Markets
Gordian Kemen (Standard Chartered) - Moderator
Marcel Kfoury (Bluecrest Capital)
Christopher Watson (Finisterre Capital)
Farouk Soussa (Goldman Sachs)  
Giyas Gokkent (JPMorgan)

5:00 p.m. Cocktail Reception 

Additional Support Provided by Goldman Sachs, JPMorgan and Standard Chartered.

Due to space limitations, this event is not open to members of the press.

Registration fee is US$50 for EMTA Member
Special registration fee for Gulf Bond and Sukuk Association Members US$50
Registration for Non-Members US$695

Inclusion of GCC Credits Focus at EMTA Seminar in London

The expansion of the JPM EMBI indices to include GCC credits was a main focus of EMTA’s Third Annual MENA/GCC Seminar in London, held on February 5, 2019. The event drew a crowd of 100 market participants and was held in partnership with the Gulf Bond and Sukuk Association (GBSA). MarketAxess sponsored the event, with additional support provided by Goldman Sachs, JPMorgan and Standard Chartered.

Standard Chartered’s Gordian Kemen served as the event’s moderator. He opened the session by asking speakers if index inclusion had already been priced into GCC debt, and what opportunities still existed. Marcel Kfoury (Blue Crest Capital Management) affirmed that, “investors would have to have a good story to miss Bahrain in their portfolios.” Kfoury reasoned that financial support from the GCC to Bahrain was such that the country would only need to access the capital markets when necessary. On the other hand, the Saudi budget continues have a wide deficit, even with optimistic oil projections at $80 per barrel. With potential international funding needs of $30 billion (assuming $60 per barrel and 50% local funding), “Saudi debt should not be trading where it is and the front-end of the KSA curve may be completely mispriced.”

In the view of Finisterre Capital’s Christopher Watson, the Qatari spread was “fundamentally wide” to other GCC credits. In contrast to Kfoury, he admitted being “torn” on Bahrain. “Last year, it wasn’t priced for the bail-out, and now it is back to the tights…basically on an index inclusion-bid. There is a scarcity of detail on the financing plan, and the debt to GDP ratio is going up,” he stated.

Goldman Sachs’ Farouk Soussa believed that the Bahraini program was credible, although “the question remains will they increase spending; there is no IMF program from doing so, and the ‘flimsy’ GCC stick is not much of a deterrent.”

Soussa expressed discomfort at Riyadh’s direction. With oil below budget assumptions, “they will need to get serious at the end of the year once they realize they won’t meet their goals. Maybe the $100 billion raised from the Ritz Carlton episode could help, and maybe they have other ways they can pull a rabbit out the hat, but the track they are on is not sustainable.”

One clear loser from GCC inclusion, in panelist views, was Oman, which Soussa noted can no longer be held by IG-only portfolios. “Oman has NO plan, unlike Bahrain; when it comes to the market –and it must—we will see the reaction,” he concluded. Kfoury concurred in his pessimism on Oman. “They don’t seem to be addressing the lower oil price and just assume more external bond funding,” he stated, underscoring that the Sultan may not wish to have austerity measures as part of his legacy. Gokkent reminded attendees that Oman’s index weighting will now be reduced as its neighbors are added. However, he noted that Oman’s tourism potential and increased gas production could help the credit.

The most bullish oil view was espoused by JPMorgan’s Giyas Gokkent, who maintained a $73 per barrel forecast. “Regional oil producers will do what they need to in order to keep oil at prices they want,” he affirmed. Gokkent noted that, “the reality in Saudi Arabia is that whenever oil goes up, government spending seems to go up; it doesn’t seem to be a priority to get to a fiscal surplus.” He saw a better path forward for Oman if the VAT was enacted.

Kfoury reviewed the Saudi Vision 2030 program. The privatization goal thus far has “clearly been a complete fiasco, specifically the Aramco deal.” Instead of growing the non-oil sector, the government increased spending, with the Ritz Carlton episode hurting private sector growth, he stated. Despite the VAT adoption, “the Saudi economy remains a bet on oil.”

Kfoury refused to rule out a devaluation of the riyal as well. “We have someone in Riyadh who is testing all the boundaries; it wouldn’t shock me if they devalued,” he concluded. Soussa disagreed, arguing that one thing the government would avoid would be a “traumatic” reduction of the purchasing power of Saudi citizens. More likely were increased taxes such as a customs tax hike. Gokkent suggested the government could cut CAPX should the oil price crash.

On Lebanon, the creation of a new government “means that the catastrophic scenario is out of the way,” according to Kfoury, who expressed a skeptical but ‘wait-and-see’ view. If reforms are enacted, the country can “turn the ship around.” Beirut’s role as a regional financial center was its saving grace in Gokkent’s opinion.

Watson considered Egypt as a potential near-term structural reform story, with the improvement of the fiscal account “meaningful, but not meaningful enough.” The current account has been aided by strong remittances, tourism receipts and gas. Gokkent saw reason for optimism on Egypt. He expected the pound to remain flat as the government kept its eye on inflation, providing support for local t-bills. Soussa expressed at the “lopsided growth” in Egypt’s real estate and oil and gas sectors, though he agreed with other panelists at the attractiveness of Egyptian t-bills.