GCC nations are likely to see further credit rating downgrades, after Fitch Ratings cut Saudi Arabia’s issuer default rating (IDR) from AA- to A+, Fisch Asset Management said in a report on Wednesday.
Gulf central banks are also expected to follow the US Federal Reserve’s move to hike rates by 25 basis points in March, the report added.
“From a supply perspective, countries continue to finance their deficits frontloaded in the bond market to fight the liquidity drain. This has led to two key outcomes: MENA issuances have gained in relevance versus other emerging market regions and sovereigns are issuing heavily, creating a crowding-out scenario,” said Philipp Good, CEO at Fisch Asset Management.
As a result, risk premiums are likely to rise after a significant rally, as GCC credit continues to be downgraded.
According to MENA debt issuance figures as of March 2017, supply from SSA (Sovereign, Supranationals and Agencies) accounts for over 80 percent of total supply in the region, from 20 percent in 2013, highlighting the need for capital.
Moreover, liquidity in the GCC is at risk of deteriorating, and this risk will increase if governments continue to borrow in domestic markets, the report said.
“As the US dollar continues to strengthen, there is the further risk of capital outflows from the region, with spending power in non-pegged countries increasing. This will, in turn, add to existing pressure on the GCC’s foreign currency reserves,” Good noted.
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