11 Sep 2017 - 1:08
Merrill Lynch keeps Qatari debt at ‘Marketweight’
By Satish Kanady / The Peninsula
Bank of America Merrill Lynch (BofAML) has kept its recommendation on Qatar’s external debt (EXD) to ‘Marketweight’. The country maintains a strong balance sheet and the fiscal/external break-even oil prices are lower than GCC peers, the Merrill Lynch analysts said yesterday.
The marketweight ranking system gives a subjective estimate of the accuracy of the current credit spread and determines whether an investment is attractive. The marketweight rating indicates that the current credit spread of an instrument is in line with expectations.
Merrill Lynch also kept its recommendation on Turkey EXD to ‘marketweight’. Meanwhile it has an Underweight recommendation on Dubai and Abu Dhabi.
Qatar’s downside risks are geopolitics, a more competitive or oversupplied LNG market, prolonged capital outflows and lower hydrocarbon prices. Upside risks are higher oil and LNG prices, a rapid resolution of the dispute with the GCC and a drop in geopolitical risk.
On Dubai’s external debt Merrill Lynch analysts said: “Merrill Lynch have an Underweight recommendation on Dubai EXD. We find Dubai’s EXD at tight spreads given still-high leverage and refinancing challenges, but the global backdrop suggests continued muddle through in terms of Dubai Inc. debt rollovers. Although BofAML expects the local bid on the shorter end to weaken due to low oil prices, there is less supply risk than in our GCC countries. Downside risks include a prolonged period of low oil prices, regional geopolitical threats, a loss of competitiveness due to a stronger US dollar, material domestic liquidity tightening, a real estate collapse, increased borrowing for projects with low return and global risk aversion, which may cut market access to Dubai Inc”.
Abu Dhabi’s external debt is tightly held due to its scarcity value. The sovereign’s balance sheet remains robust nevertheless with a large stock of foreign assets, despite fiscal deterioration. Downside risks are a prolonged period of low oil prices, regional geopolitical threats, and inability to implement sufficient fiscal consolidation. Upside risks are a rebound in oil prices, improved local liquidity and more vigorous fiscal consolidation to slow drawdown of foreign assets.
Merrill Lynch as a Marketweight recommendation on Egypt. The IMF deal supports the external position but spreads have already moved to price in this outcome. Politics (governance and security), the socioeconomic impact of fiscal/Fx reforms, failure to mobilize sufficient external financing or GCC aid and fiscal consolidation slippage are downside risks. Steady implementation of supportive macro policies as part of the IMF programme would provide upside risk.
Turkey spreads have tightened materially and market positioning is less supportive. Valuations still incorporate a risk premium relative to Turkey’s actual credit ratings. In the absence of negative triggers from potential announcements on US fiscal policy as well as domestic political developments and events in Europe, spreads could continue to normalise further.
The presence of ample fiscal buffers, low debt provides some offset to Turkey’s high external rollover requirements. In light of this, we see spreads as range-bound short term.