The outlook for sovereign bonds in the Middle East has improved this year due to higher oil prices, increasing vaccination rates and reform measures implemented in key states in the region, according to UBS’ latest chief investment office report.
However, risks continue to exist, such as slower global growth, monetary policy tightening and lower commodity prices. Regional tensions, as well as stringent Chinese regulatory actions, the strength of the US dollar and “reform fatigue” also pose risk.
“The reform measures they’ve initiated are one of the factors driving our favourable outlook, also supported by increasing vaccination rates and, undeniably, rising crude oil prices. Important risks remain, but the key GCC economies seem on track,” said Ali Janoudi, head of wealth management Middle East and Africa at UBS.
UBS said it expects stronger government revenues and higher export receipts to strengthen fiscal and current account balances in the region this year.
The large, low-cost hydrocarbon capacities of the states in the region are likewise expected to support their fundamentals “in a stable energy transition scenario”.
However, UBS noted that “fiscal gaps” are still higher than the levels seen prior to the pandemic.
It said the key determinant of the creditworthiness of major countries in the Gul will be the speed of their energy transition away from fossil fuel, which is currently a priority among governments in the GCC region.
“Looking ahead, the speed of the energy transition will be a key determinant of the creditworthiness of major GCC countries. Our report assesses how these nations are positioned to meet the challenges of the future under two possible paths of the energy transition,” said Michael Bolliger, UBS chief investment officer for global emerging markets.
Crude oil prices have rallied 37 percent this year. Among the countries in the region, the UAE has one of the world’s highest vaccination rates, with the number of COVID-19 vaccine doses administered reaching 20.8 million. The UAE has also rolled out several reforms and initiatives to attract more talent, as well as investments.
(Writing by Cleofe Maceda; editing by Mily Chakrabarty)
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