Oil collapse pummels GCC credit, Lebanon CDS spikes on political deadlock
This week’s collapse in oil prices has sent shockwaves across the GCC credit space, said two UAE-based asset managers and a London-based banker. Both WTI and Brent crude hit a three-year low on Tuesday (13 November), and although prices had stabilised by Thursday, a negative mood has set in, they said.
“[MENA credit spreads are] noticeably wider on the back of the oil price drop, I think people were complacent about [Brent crude] prices remaining in the USD 80 bracket, so the surprise effect was quite dramatic,” said the banker. “Still, today [Thursday] is better than yesterday, and yesterday was better than the day before. Tuesday was an absolute bloodbath.”
Brent crudel trades at USD 66.7 a barrel at time of writing, compared to 80.78 on 15 October. WTI crude trades at USD 56.34 a barrel, down from USD 71.78 on 15 October.
In the credit space, Oman was particularly badly burnt, with its long-end bond spreads 30bps wider on the week, the asset managers noted. Oman’s USD 2.75bn 6.75% 2048s trade at 88.64/89.64 for a 7.74%/7.64% yield, a trader run showed.
Even higher-grade credits like Saudi Arabia saw significant spread widenings of 15bps to 20bps in the longer-dated paper, the first manager continued. Saudi Arabia’s USD 3.5bn 5% 2049 bond trades at 94.12/94.62 for a 5.40%/5.36% yield.
"I think we are likely to see a new oil price environment settle in, with WTI at USD 50 and Brent at USD 65, at least until OPEC's December meeting,” said the banker.
Members of the oil cartel will meet in early December to discuss their stance on oil production, and both the banker and asset manager expected members to agree to moderate supply in order to defend prices.
“The noise coming out of the OPEC Abu Dhabi meetings this week [is leading most people to expect OPEC] to pull back from the recent supply increases they had been putting in place as a way to stem Iranian oil production,” said the first asset manager. “So I think although markets reacted badly to the oil price drop, most people see this as a technical factor for now, a blip if you will.”
But oil was not the only factor hurting the region, according to those polled, who pointed to broader emerging market weakness due to continued US dollar strength and US Treasury volatility. The MENA is now more exposed than ever to these global emerging market trends, following the recent inclusion of most GCC sovereign credits into major trading indexes, the first asset manager argued.
“I have noticed that those GCC names recently included in the indexes have been more affected by the sell-off, which to me points towards a new dynamic,” the first asset manager said.
“This inclusion exposes them more EM investors with global mandates, who tend to be highly reactive to broader macroeconomic headlines,” the first asset manager continued. “This is a change from having a predominantly regionally focused investor base. So yes, oil prices are definitely a major market driver, but I think not the only one.”
Lebanon’s five-year credit default swap (CDS) jumped 50bps on the week to 750bps, as the heavily indebted country faced yet another obstacle to government formation.
On Saturday, the leader of Shiite group Hezbollah demanded that a cabinet seat be awarded to one of its Sunni allies, threatening to undo all negotiations if the condition were not met. But this demand was outright rejected by acting Prime Minister Saad Hariri, who heads the primarily Sunni Future Movement.
Hariri has been trying to form a government since the Lebanese general elections took place in May, and failure to do so could put much needed donor funding at risk, the first asset manager said. Indeed, Lebanon received pledges for USD 11bn in loans and grants following an April donor meeting in Paris, but disbursement is contingent on government formation.
“The only way out [their debt spiral] for them is to unlock donor support, and they need a government for this,” said the first asset manager. “A few weeks ago it looked like they were making progress, but the events this week have tossed it all out of the window.”
A trader run showed that z-spreads on the country’s closest maturities widened the most, adding anything between 137bps and 40bps on the week. The longer-dated bonds are trading in the mid-70 range with low double-digit yields, joining fellow distressed sovereigns like Zambia.
“Lebanon is a hotbed of risk, and increasingly so,” said the first asset manager. “It's likely there will continue to be a lot of political headline risk for the next few months, but coming from the region, I can't think of anything harder to predict than Lebanese politics, and I would question anyone who pretends they can.”