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Zawya
03-03-2025
- Business
- Zawya
Qatar develops as bond markets change
Gulf nations are acquiring developed market status as more advanced nations further increase their debt. The bond markets are signalling profound shifts in the global economy. In a highly significant move, Qatar has been upgraded in category from emerging market to developed market, by the investment bank JP Morgan Chase & Co, along with Kuwait. The bank announced that the two Gulf nations will be removed from its Emerging Markets Bond Index in a phased manner, over a six-month period beginning end-March. The bank will consider the same reclassification for the United Arab Emirates next year. It is possible that the higher ranking for Qatar and Kuwait will be followed by other index providers. At around the same time, in mid-February, Qatar concluded a heavily over-subscribed bond issuance on two tranches. A $1bn tranche maturing in three years carries a coupon rate of 4.5%, while a $2bn tranche maturing in 10 years has a coupon rate of 4.875%. The rates represent respectively 30 basis points and 45 basis points over 10-year US Treasuries. This represents a tightening by 30 and 35 basis points respectively compared with the Initial Price Target (IPT). The issuance was 5.8 times over-subscribed; orders topped $17bn. The ability to attract such high demand even after tightening the price, along with the upgrading to developed market status, is a fair reflection of the economic progress the state has made across a range of issues: Not just fiscal responsibility, but infrastructure improvements, developing a sound tax base, and strengthening export earnings through the expansion of extraction from the North Field gas reserves. Qatar had become an outlier in terms of its strong fiscal position not only within emerging markets, but more widely. Its public debt is below 50% of GDP, and has been progressively reduced since the Covid-19 pandemic and the investment for the 2022 FIFA World Cup. By contrast, the proportion of public debt to GDP is around 100% or higher for some developed nations, notably France, the UK and the US. If an emerging economy had such high debt levels, this would potentially result in strict measures being imposed by the IMF, and difficulty in finding investors for bond issuance, risking default. In part, the richer nations can continue to sustain this owing to the depth and liquidity of their capital markets, strong tax base and diversified economies, but there are signs this year from the bond markets that no government can be complacent. Central banks have reduced interest rates, which normally would cause yields on government bonds to fall, but this has not consistently been the case. Mortgage rates have not fallen either. Investors are anticipating higher inflation, and interest rate levels that may stay the same or even be increased. The average fiscal deficit across the G7 countries for 2025 is 6% of GDP; the US is expected to issue bonds totalling 7% of GDP, which amounts to $2tn. The largest economies have also engaged in quantitative tightening, meaning more investors have to be attracted to bond issuances. These are colossal sums. Will the confidence hold? Probably: The debt levels were as high or higher during the Second World War, while inflation and interest rates were much higher in the 1970s and 1980s, which caused investors to shun government bonds. China and Japan have been reducing their exposure to US Treasuries, and several central banks, notably that of China, have been buying gold. For the foreseeable future, however, the shifts are not sufficient in scale to cause a major spike in yields or a collapse in confidence, given the depth and liquidity of the capital markets, growth prospects for the US and the dollar's status as the world's reserve currency. There are concerns, nonetheless, about the potential impact of tariffs and tax cuts by the Trump administration, and little sign that the fiscal deficit will be reduced. There is pressure on all western governments to increase defence spending owing to geopolitical tensions. But while a spectacular default by a major economy is unlikely – although bond investors did force a U-turn and a change in Prime Minister in the UK in late 2022 – what the dynamics reveal are a shifting economic world order, in which some emerging markets are beginning fully to emerge as developed economies, and with lower debt than the largest western economies. The changes may not be sudden, but they are profound. The author is a Qatari banker, with many years of experience in the banking sector in senior positions. © Gulf Times Newspaper 2022 Provided by SyndiGate Media Inc. (
Zawya
24-02-2025
- Business
- Zawya
JPMorgan's reclassification of Kuwait signals strong economic prospects
KUWAIT CITY: Kuwait is set to make a significant transition in the global financial landscape, with JPMorgan announcing its reclassification from an emerging market to a developed market. This change is part of a broader shift that also affects Qatar, with both nations scheduled to be gradually removed from JPMorgan's Emerging Markets Bond Index (EMBI). The removal process, which begins on March 31, is expected to unfold over a six-month period. Although the reclassification primarily impacts government bonds, the move is anticipated to open new avenues for foreign investment, further stabilizing and growing Kuwait's financial environment. JPMorgan's EMBI is a key reference for investors tracking emerging market bonds, which typically carry higher risk but offer potentially higher returns. As a result of the reclassification, Kuwait's bonds will no longer be included in the EMBI, a shift that will impact capital flows for investors involved in emerging market debt. As of January 31, Kuwait accounted for 0.6% of the EMBI Global Diversified Index, and the nation's exit from the index will contribute to a narrowing of bond trading opportunities in emerging markets. For Kuwait, the reclassification is seen as a step forward, reflecting its growing economic stability. Although the change will likely reduce the investor base within emerging markets, experts suggest that Kuwait will continue to attract investment from those looking beyond the EMBI's scope. Anders Faergemann, co-head of global fixed income in emerging markets at Pinebridge Investments, stated that, even without being part of the benchmark, Kuwait's economy remains a promising destination for investment due to its fiscal prudence and solid credit profile. Kuwait's reclassification aligns with a broader trend of economic and legislative reforms designed to bolster foreign investment. The country's Finance Minister, Noura Al-Fassam, recently stated that Kuwait's debt law is now in its final stages. The passage of this law is expected to enable Kuwait to issue debt for the first time since 2017, potentially raising up to $65 billion over the next 50 years. This move, which is part of a larger effort to diversify Kuwait's revenue base away from oil dependence, signals a long-term commitment to improving the country's financial infrastructure. The reclassification is also expected to draw more foreign investors into the local market, particularly in the Kuwait Stock Exchange (KSE). The KSE has been preparing for this shift by introducing new investment tools such as corporate bonds, sukuk, and index funds, all of which are likely to attract greater capital flows. Additionally, a new central counterparty (CCP) system is being developed to further enhance market liquidity and facilitate investment, particularly from foreign institutions. These reforms are poised to strengthen investor confidence in Kuwait's economic prospects and boost long-term market stability. Despite the positive outlook, Kuwait faces fiscal challenges. The government has projected a budget deficit of 6.31 billion dinars ($20.4 billion) for the fiscal year 2025-2026, a significant increase from the current year's estimated deficit of 5.6 billion dinars ($18.2 billion). This rise is partly due to lower-than-expected oil revenues, underscoring Kuwait's ongoing vulnerability to fluctuations in global oil prices. However, analysts remain optimistic that Kuwait will successfully manage its fiscal challenges, especially as the government continues to invest in infrastructure projects and diversify its economy. The country's planned debt issuance under the new law will provide additional resources for capital expenditure, which is vital for ongoing development efforts. The reclassification of Kuwait, along with Qatar, from emerging to developed market status, will likely influence broader financial trends. The removal of both nations from the EMBI is expected to reduce the amount of capital flowing into emerging markets, which may increase the yield investors demand to hold emerging market bonds compared to U.S. Treasuries. This yield spread is expected to widen by approximately 11 basis points as a result of the reclassification. Kuwait's departure from the EMBI reflects its increased financial stability, but it also suggests a shift in the global investment landscape. With Kuwait's bond market now outside the EMBI framework, it is expected to continue drawing attention from investors seeking low-risk opportunities in developed markets, especially as global demand for stable and diverse investment opportunities grows. The transition to developed market status marks a critical juncture in Kuwait's economic evolution. As the country navigates its fiscal challenges and undertakes new legislative measures, the reclassification is poised to enhance its global financial standing. With increased foreign investment, greater market liquidity, and a commitment to economic diversification, Kuwait is positioning itself for long-term growth. As foreign institutions and global funds increasingly look to invest in Kuwait, the country's financial markets will continue to expand. The reclassification not only reflects Kuwait's evolving creditworthiness but also underscores the nation's growing importance as an attractive investment hub in the Middle East. While Kuwait's removal from the EMBI will affect emerging market bond traders, the reclassification has clear long-term benefits. As Kuwait moves toward a more diversified and stable economic future, the investment community will likely examine the opportunities emerging within its borders more closely. The next few years will be critical for Kuwait as it continues to strengthen its financial framework and attract international investment.
Arab Times
23-02-2025
- Business
- Arab Times
JPMorgan's reclassification of Kuwait signals strong economic prospects
KUWAIT CITY, Feb 23: Kuwait is set to make a significant transition in the global financial landscape, with JPMorgan announcing its reclassification from an emerging market to a developed market. This change is part of a broader shift that also affects Qatar, with both nations scheduled to be gradually removed from JPMorgan's Emerging Markets Bond Index (EMBI). The removal process, which begins on March 31, is expected to unfold over a six-month period. Although the reclassification primarily impacts government bonds, the move is anticipated to open new avenues for foreign investment, further stabilizing and growing Kuwait's financial environment. JPMorgan's EMBI is a key reference for investors tracking emerging market bonds, which typically carry higher risk but offer potentially higher returns. As a result of the reclassification, Kuwait's bonds will no longer be included in the EMBI, a shift that will impact capital flows for investors involved in emerging market debt. As of January 31, Kuwait accounted for 0.6% of the EMBI Global Diversified Index, and the nation's exit from the index will contribute to a narrowing of bond trading opportunities in emerging markets. For Kuwait, the reclassification is seen as a step forward, reflecting its growing economic stability. Although the change will likely reduce the investor base within emerging markets, experts suggest that Kuwait will continue to attract investment from those looking beyond the EMBI's scope. Anders Faergemann, co-head of global fixed income in emerging markets at Pinebridge Investments, stated that, even without being part of the benchmark, Kuwait's economy remains a promising destination for investment due to its fiscal prudence and solid credit profile. Kuwait's reclassification aligns with a broader trend of economic and legislative reforms designed to bolster foreign investment. The country's Finance Minister, Noura Al-Fassam, recently stated that Kuwait's debt law is now in its final stages. The passage of this law is expected to enable Kuwait to issue debt for the first time since 2017, potentially raising up to $65 billion over the next 50 years. This move, which is part of a larger effort to diversify Kuwait's revenue base away from oil dependence, signals a long-term commitment to improving the country's financial infrastructure. The reclassification is also expected to draw more foreign investors into the local market, particularly in the Kuwait Stock Exchange (KSE). The KSE has been preparing for this shift by introducing new investment tools such as corporate bonds, sukuk, and index funds, all of which are likely to attract greater capital flows. Additionally, a new central counterparty (CCP) system is being developed to further enhance market liquidity and facilitate investment, particularly from foreign institutions. These reforms are poised to strengthen investor confidence in Kuwait's economic prospects and boost long-term market stability. Despite the positive outlook, Kuwait faces fiscal challenges. The government has projected a budget deficit of 6.31 billion dinars ($20.4 billion) for the fiscal year 2025-2026, a significant increase from the current year's estimated deficit of 5.6 billion dinars ($18.2 billion). This rise is partly due to lower-than-expected oil revenues, underscoring Kuwait's ongoing vulnerability to fluctuations in global oil prices. However, analysts remain optimistic that Kuwait will successfully manage its fiscal challenges, especially as the government continues to invest in infrastructure projects and diversify its economy. The country's planned debt issuance under the new law will provide additional resources for capital expenditure, which is vital for ongoing development efforts. The reclassification of Kuwait, along with Qatar, from emerging to developed market status, will likely influence broader financial trends. The removal of both nations from the EMBI is expected to reduce the amount of capital flowing into emerging markets, which may increase the yield investors demand to hold emerging market bonds compared to U.S. Treasuries. This yield spread is expected to widen by approximately 11 basis points as a result of the reclassification. Kuwait's departure from the EMBI reflects its increased financial stability, but it also suggests a shift in the global investment landscape. With Kuwait's bond market now outside the EMBI framework, it is expected to continue drawing attention from investors seeking low-risk opportunities in developed markets, especially as global demand for stable and diverse investment opportunities grows. The transition to developed market status marks a critical juncture in Kuwait's economic evolution. As the country navigates its fiscal challenges and undertakes new legislative measures, the reclassification is poised to enhance its global financial standing. With increased foreign investment, greater market liquidity, and a commitment to economic diversification, Kuwait is positioning itself for long-term growth. As foreign institutions and global funds increasingly look to invest in Kuwait, the country's financial markets will continue to expand. The reclassification not only reflects Kuwait's evolving creditworthiness but also underscores the nation's growing importance as an attractive investment hub in the Middle East. While Kuwait's removal from the EMBI will affect emerging market bond traders, the reclassification has clear long-term benefits. As Kuwait moves toward a more diversified and stable economic future, the investment community will likely examine the opportunities emerging within its borders more closely. The next few years will be critical for Kuwait as it continues to strengthen its financial framework and attract international investment.
