After a robust 18 month rally of bonds, stocks and credit default swaps, the Gulf was due for a correction. It has benefited from being seen by EM investors as a safe haven, especially during the unrest and subsequent invasion in Ukraine. But no rally proceeds in a straight line and the Gulf is not without its own regional fractions.
Saudi Arabia, the United Arab Emirates and Bahrain ordered their diplomatic envoys home from Qatar last week, citing foreign policy disagreements. The row has developed further since with Saudi Arabia saying it will shut down the offices of Qatari-headquartered Al Jazeera. Saudi and UAE have also asked those nationals employed by the news station to resign.
The argument stems from Qatar’s backing of ousted former Egypt president Mohammed Morsi and its protection of people linked to the Muslim Brotherhood — an organisation that Saudi Arabia has branded terrorists.
Bankers and investors in Qatar and the UAE see the spat as a war of wills between the region’s historic power, Saudi, and up and coming rival Qatar. Rather than draw a line under last year’s tensions over Egypt, the change of emir in Qatar has encouraged the smaller state to test its strength further.
The most visible financial impact of this tension has been seen in Qatari CDS and bonds. Qatar’s five year swap has surged 17bp to 65bp over the past five days, while its 4.5% 2022 bond fell from 110 to 108 over the last week. Bankers initially put this down to international investors getting over-excited and pointed to the calmer response in equities, which tend to be held by more regionally knowledgeable locals.
Qatari stocks have also begun to catch up, however. Dubai’s bonds and sukuk have dropped a point or two, while UAE and Saudi CDS have also widened 3-4bp.
But this has to be placed in the context of the preceding rally. Qatar’s ’22s, for example, had rallied from 106 at the start of the year. No fund manager is ever going to be sacked for taking a profit and if ever they needed an excuse the spat has given them one.
For investors, if not issuers, the pause is healthy. What they do with the time is the question.
They should look at the Muslim world’s divisions in greater detail. Neither Qatar nor Saudi is going to prostrate itself before the other so this particular spat will be dealt with behind closed doors — but there may be no lasting cohesion. Foreign policy posturing on Egypt, Iraq and Syria could all re-ignite the regional divisions.
But most of all investors should get set for the next move upwards. Little has happened to change the complexion of the region as a safe haven — and should Qatari borrowers come to market they will likely do well, say locals. Fundamentals still look good, no one is actually at war, and investors, after all, are starved of new paper.
It won’t take much before the leaders are all smiles and the pipe is being passed around again.