Confidence in GCC bonds weakens amid lower oil prices: report

International bonds from oil-exporting GCC states are losing some of their safe haven status as lower oil prices take a toll on their economies, Reuters reported, citing industry experts.

GCC bonds outperformed Russian and Latin American debt in recent weeks, yet they have underperformed Asia and Eastern Europe, according to Sergey Dergachev, senior portfolio manager for emerging market debt at Union Investment Privatfonds in Germany. “They are relatively in the middle of the emerging market credit universe," he told the news agency.

If oil prices persist to drop, analysts warn that GCC credit risk may be repriced.

Saudi five-year credit default swaps (CDS) hit 120 basis points (bps) this week doubling from their mark at the end of July. The move put Saudi Arabia closer to countries such as the Philippines (114 bps). The kingdom was previously in the range of countries like South Korea (73 bps).

However, GCC bonds are expected to retain support from local investors who are willing to buy bonds when foreigners start selling off. "GCC credit risk remains in better shape compared to most other emerging market bonds mainly because of the stronger underlying fundamentals, higher credit ratings and sufficient liquidity buffers from the government to intervene and support the markets in case of need," Apostolos Bantis, a Dubai-based credit analyst at Commerzbank told Reuters.

At the same time, experts say the region could eventually be divided into three bond classes. Qatar, Abu Dhabi and Kuwait may be placed on the top due to their giant reserves and small population, followed by Saudi Arabia and Dubai in the middle. Oman and Bahrain, which each have modest reserves and big fiscal deficits, would fit into the bottom bracket in such a scenario.