MENA - KEY VIEWS ON BENCHMARK INTERNATIONAL BONDS
| Issuer || Instrument || Price || Yield || View || Justification |
| Dubai || 7.75% 2020 || 123.2 || 3.8 || Bullish || Solid macroeconomic fundamentals will underpin further gains. |
| Jordan || 3.88% 2015 || 100.4 || 3.6 || Short-Term Bullish || The US loan guarantee will ensure that borrowing costs remain relatively low in 2014. |
| Lebanon || 6.37% 2020 || 103.8 || 5.6 || Bearish || Political and macroeconomic risks remain elevated, with risks lying firmly to the downside. |
| Bahrain || 5.5% 2020 || 108.6 || 3.9 || Bearish || Despite being implicitly backed by Saudi Arabia, moderate economic growth is expected, and relatively elevated political risks are clouding the outlook. |
| Morocco || 4.5% 2020 || 104.7 || 3.8 || Neutral- Bullish || Momentum for reform will encourage investors. |
| Abu Dhabi || 6.75% 2019 || 122.1 || 2.2 || Neutral || Although safe-haven status will limit downside risks, gains have peaked. |
| Qatar || 5.25% 2020 || 113.1 || 2.7 || Neutral || Despite the Gulf state's reputation as a safe haven in a volatile region, gains have peaked. |
| Egypt || 5.75% 2020 || 101.0 || 5.5 || Short-Term Bullish || Improving macroeconomic and political conditions will encourage investors, but the majority of gains are now behind us. |
| Iraq || 5.8% 2028 || 86.0 || 7.4 || Bearish || Political risks are clouding the outlook, and a move back above 7.80% over the coming months is certainly possible. |
| Source: BMI, Bloomberg |
We believe that the majority of recent gains in fixed income markets in the Middle East and North Africa (MENA) region are now behind us, and we reaffirm our neutral-bearish outlook on debt markets in the region over the medium term. Our view is broadly in line with BMI's global research team belief that risks lie to the downside for global fixed income over the coming quarters. Such a view is underpinned by our belief that the US 10-Year Treasury yield bottomed out in September 2012. Although US 10-year Treasury yields are standing lower at the time of writing compared to end-2013, we believe that the combination of stronger economic data, and the signalling value of tapering from the Fed, will send US yields above the 3.00% level in the coming months.
| Heading Towards 3.00% |
|US - 10-Year Treasury Bond Yield, %|
That said, a combination of favourable macroeconomic and political developments will ensure that yields will remain low or decline further in some debt markets in MENA. We view Dubai as the GCC's bright spot, while yields of Jordan, Egypt and Moroccan bonds will also remain low over the coming quarters.
| Potential For Further Gains |
|Dubai - US$ 2020 Bond Yield, %|
GCC: Dubai Over Abu Dhabi, Qatar Over Bahrain
Yields on fixed income markets in the GCC fell significantly since the beginning of 2013. Yields on Dubai's US$ 2020 bond were standing at 3.77% at one point on February 21 and yields on Abu Dhabi's US$ 2019 bond at 2.16%, having increased by 40 and 18 basis points, respectively, since January 1. Yields on Qatar's US$ 2020 widened by 38 basis points since the beginning of the year, and are currently trading at 2.68%, while Bahrain's US$ 2020 bond yields were standing at 3.92% on February 21, having dropped by 94 basis points over the same period.
Given the UAE's relative macroeconomic and political stability compared to most countries in MENA, Dubai and Abu Dhabi's debt markets will remain attractive. While most of the gains are now behind us, we see Dubai 2020 yields remaining near record lows over the course of 2014. In particular, we expect Dubai's debt restructuring process to progress fairly smoothly, with the US$30.0bn in debt reaching maturity in 2014 being mostly rolled over, which will reassure investors going forward. We see potential for yields dropping below all-time low of 3.45 % the coming weeks.
| Sideways Trading Ahead |
|Abu Dhabi - US$ 2019 Bond Yield, %|
Abu Dhabi will benefit from Dubai's smooth debt restructuring, as approximately US$20bn of Dubai's debt are due to Abu Dhabi. That said, the combination of record low yields and investors starting to increasingly price in the US Federal Reserve tapering its bond purchasing programme and raising interest rates will in our view put some upside pressure on yields, which we see trading between 3.60-4.60% over the coming months.
| Yields Remaining Low |
|Qatar - US$ 2020 Bond Yield, %|
Although Qatar's public debt stands at 36.0% of GDP, relatively elevated by GCC standards, the emirate's bright macroeconomic outlook and political stability will ensure that it is seen as a regional safe haven. While rising US bond yields will put upside pressure on bond yields, we hold a neutral medium-term view on the US$ 2020 bond, and see yields trading between 2.30-3.00% over the coming months. The outlook for Bahrain's fixed income is less inspiring. The continued uncertainty of Bahrain's political trajectory remains a key downside risk, and we expect Bahrain's economy to expand at a moderate pace over 2014 - we forecast real GDP growth of 3.4%, down from an estimated 4.3% in 2013. The 2020 bond is likely to pare back some of its gains going forward, and we target losses toward 4.30% on the first instance.
| Paring Back Gains |
|Bahrain - US$2020 Bond Yield, %|
North Africa: Outlook Encouraging Despite Risks
Yields of Egypt's US$ 2020 bond are currently trading at 5.53%, having dropped by 482 basis points since all time highs in July. The fall has mostly come on the back of substantial assistance granted by the Gulf States. Kuwait, Saudi Arabia and the UAE pledged US$16bn in 2013 - of which US$7bn have already been disbursed - and the Saudi government reportedly pledged an additional US$4.0bn at the end of January. Moreover, we expect continued improvement in the political landscape and, to a greater extent, the economy over the coming months, which will ensure that yields remain low. However, we believe that much of the gains are behind us at this stage. Yields are unlikely to drop below 5.00% over the coming weeks, and we seen sideways trading between 5.20- 6.00% going forward.
| Yields Have Further To Fall |
|Egypt - US$2020 Bond, Yield %|
Morocco's 2020 Eurobond yields stood at 3.84% at the time of writing. We see potential for some further downside in yields over the coming weeks, mainly on the back of Rabat's decision on February 1 to cut energy subsidies ( see 'Government Maintains Reform Momentum', February 7). We also remain relatively bullish on the medium-term prospects for the instrument, and target yields moving towards 3.60% over the coming months, with potential for a drop towards the record low of 3.38% reached in May 2013. That said, we also flag key upside risks to yields. In particular, popular protests are likely to intensify over the coming quarters as subsidy cuts begin to erode consumers' purchasing power. An uptick in popular unrest could deter away investors from Europe and the Gulf, which compose a sizeable proportion of the 2020 Eurobond buyers.
| Gains To Continue |
|Morocco - Eurobond 2020 Yield, %|
Levant: Jordan A Bright Spot
Yields on Lebanon's benchmark US$ 2020 bond fell by 134 basis points since hitting multi-year highs in June. Given that a majority of Lebanese government debt is domestically owned, both within the country and amongst the diaspora, bonds are fairly well insulated from political and macroeconomic risks. In addition, prominent Sunni politician Tammam Salam announced on February 15 the formation of a new government under his leadership, breaking a 10-month political deadlock in the country, which would likely result in further gains over the coming weeks.
| Bearish Over The Medium Term |
|Lebanon - US$2020 Bond Yield, %|
That said, medium-term risks to yields remain to the upside in our view. Lebanon's fiscal and external positions remain precarious, and, more importantly perhaps, sectarian violence have been worsening steadily over the past few months. We see yields coming back above the 6.0% level in H114.
| US Guarantee Is Key |
|Jordan - US$ 2015 Bond Yield, %|
Yields on Jordan's US$ 2015 bond stood at 3.58% at the time of writing, having dropped by 129 basis points since March 28, when the US government guaranteed the country's debt in international debt markets. The US promised on February 14 to provide US$1bn in loan guarantees to Jordan and to renew an accord ensuring a minimum level of annual aid through 2019, a development which will in our view provide further downside risks to yields over the short term. Although yields will remain low, they are unlikely to drop below all-time lows of 3.35% over the coming months, as external difficulties including lower Egyptian gas supplies and the country's exposure to the Syrian civil war will provide key upside pressure to yields.
| Political Risks Weighing On Market |
|Iraq - US$ 2028 Bond Yield, %|
We maintain our bearish view on Iraq's US$ 2028 bond. Yields have been trading broadly sideways since the beginning of Q413, with investors undeterred by increasing political risks in the country. That said, we expect levels of violence to remain elevated in 2014, with political instability set to increase in proximity of parliamentary elections, to be held in April. We believe that further setbacks in the security situation will likely lead to falling bond prices over the coming month, and see potential for yields to widen above the 7.80% level over the next few months.