Fitch: Declining impact of geopolitical tensions on Gulf bonds
Al Arabiya – Bashar Al-Natour, Global Head of Islamic Finance at Fitch Ratings, said that the agency’s internal outlook does not point to an interest rate hike by the US Federal Reserve this year, but rather suggests that rate cuts are likely to begin next year.
In an interview with Al Arabiya Business, he explained that the focus in the region is primarily on the US dollar, as most international bond and sukuk issuances in Gulf countries are denominated in dollars or in currencies pegged to it.
He noted that the bond and sukuk market in the region is influenced by several factors beyond US interest rates, including geopolitical tensions and the uncertainty that characterized the recent past.
He added that these factors have impacted bond and sukuk prices alongside their dollar linkage, emphasizing the need to distinguish between bonds and sukuk, and between investment-grade and non-investment-grade issuances.
He stressed that additional geopolitical risks that emerged in recent months have receded or nearly disappeared for investment-grade issuances, while remaining more pronounced for non-investment-grade issuances. He cautioned that risk premiums in the non-investment-grade bond category have improved, but have not yet returned to the levels prevailing before recent events.
He clarified that issuance appetite has declined significantly in recent months, despite the continued need for financing and diversification of funding sources. He pointed out that several issuers have preferred to delay offerings rather than incur higher financing costs, particularly since more than 80 percent of sukuk issuances in the region fall within the investment-grade category, giving issuers greater flexibility in choosing the timing of their offerings.
He added that investors have become more cautious in pricing geopolitical risks, which has led to a decline in activity in the new issuance market. He confirmed that uncertainty has significantly affected the decisions of both investors and issuers.
He warned that there are differences between countries, sectors, and the nature of each issuance, but the correlation between dollar-denominated Gulf bonds and sukuk and US Treasury bonds remains extremely high, making them highly sensitive to movements in US interest rates and yields.
