The impact of recent geopolitical tensions on Gulf investment-grade bonds and sukuk has eased significantly, although risks remain more pronounced for non-investment-grade debt, according to Fitch Ratings’ global head of Islamic finance Bashar Al Natoor.
Speaking to Al Arabiya Business, Al Natoor said Fitch’s internal forecasts do not point to an increase in US interest rates this year, with rate cuts expected to begin next year. He said US monetary policy remains particularly important for Gulf debt markets because most international bond and sukuk issuances from Gulf countries are denominated in US dollars or currencies pegged to the dollar.
Gulf debt markets face multiple pressures
Al Natoor said Gulf bond and sukuk markets are influenced by factors beyond US interest rates, including geopolitical tensions and uncertainty that affected markets in recent months. These factors have influenced bond and sukuk prices, making it important to distinguish between different types of debt and between investment-grade and non-investment-grade issuances, he said.
For investment-grade issuances, the additional geopolitical risks that emerged recently have diminished or almost disappeared. Risks remain more evident in the non-investment-grade segment. Risk premiums on non-investment-grade bonds have improved, but have not yet returned to their levels before the recent period of heightened tensions, Al Natoor said.
Issuers delay deals as financing costs rise
The appetite for new issuance has declined significantly, despite continued financing needs and efforts by issuers to diversify funding sources. Al Natoor said some issuers have chosen to postpone offerings rather than accept higher financing costs. More than 80 percent of sukuk issuances in the region are investment-grade, giving issuers greater flexibility over when to access the market.
Investors have also become more cautious when pricing geopolitical risks, contributing to weaker activity in the new-issuance market. The prevailing uncertainty has affected the decisions of both investors and issuers, he said.
Gulf debt remains highly sensitive to US yields
Al Natoor said rising yields on long-term US Treasury bonds directly affect dollar-denominated Gulf bonds because most Gulf currencies are pegged to the US dollar and most international bond and sukuk issues are denominated in dollars. Very long-term debt, such as 30-year bonds, remains limited in the region, while most issuance is concentrated in three-, five- and seven-year maturities.
Although the impact varies by country, sector and individual issue, Al Natoor said the correlation between Gulf dollar-denominated bonds and sukuk and US Treasury bonds remains very high. As a result, Gulf debt markets remain highly sensitive to movements in US interest rates and Treasury yields.
