RIYADH: Credit risk in Saudi Arabia and the United Arab Emirates, the two biggest Arab economies, is falling to record lows as prospects for a deal with Iran over its nuclear program augments improving investor sentiment toward the region.
Five-year credit default swaps for Saudi Arabia fell seven basis points this month to an all-time low of 45 on May 13, the same level as Abu Dhabi, the UAE’s largest oil producer, according to data compiled by Bloomberg. The contracts for Dubai dropped 10 basis points in the period to 155, also a record.
As diplomats start drafting a final accord this week to resolve a decadelong standoff between Iran and world powers over the country’s nuclear program, Saudi Arabia said it was willing to talk to its rival in an effort to stabilize the region. A deal reduces the risk of an Israeli or U.S. military action against Iran and bolsters economic growth in the six-member Gulf Cooperation Council.
“The Iranian risk-factor is dissipating and that is helping reduce all kinds of risk premia, including CDSs,” said John Sfakianakis, chief investment strategist at MASIC in Riyadh. “The positive macroeconomic climate and robust government spending has also helped lower risk.”
Saudi Foreign Minister Prince Saud al-Faisal said Sunday that he invited his Iranian counterpart to visit the kingdom. The two countries are fighting a proxy war in Syria, with Saudi Arabia backing the mostly Sunni rebels trying to topple Iranian-backed President Bashar Assad.
Economic growth is accelerating in the GCC as governments spend hundreds of billions of dollars on infrastructure. Credit default swaps in energy-rich Norway, home to the world’s largest sovereign wealth fund, were little changed this month at 14 basis points, data compiled by Bloomberg show.
“An Iranian nuclear deal will demonstrate to Western investors that the main threat to security around the Gulf littoral has dropped considerably,” said Theodore Karasik, director of research at the Institute for Near East and Gulf Military Analysis in Dubai. Iran has repeatedly said that its nuclear program is peaceful.
For Sergey Dergachev, who helps oversee about $9 billion as a fund manager at Union Investment Privatfonds in Frankfurt, the GCC’s stability as well as Dubai’s economic rebound are among the main reasons for the risk rally, rather than the talks.
“The Iran issue has no relevance for spreads of GCC credits,” he said.
Economic growth among the GCC oil producers is forecast to accelerate to 4.4 percent in 2015 from 4.2 percent this year, according to International Monetary Fund estimates. Dubai’s economy may expand 5.1 percent this year, the IMF forecasts.
“Look at planned capital expenditure across the GCC, and especially Saudi Arabia, the momentum is continuing,” said Abdulwahid al-Matar, Riyadh-based head of trading at Saudi Hollandi Bank. “Oil prices are above a $100 a barrel.”
He said the easing tension with Iran is helping reduce the credit risk of GCC bond issuers.
“There is more optimistic news about the Iranian situation,” he said.
Credit default swaps in Bahrain, the Gulf country hit hardest by violent protests three years ago, declined 18 basis points this month to 158, the lowest in four years. Saudi Arabia accused Iran of inciting Bahrain’s Shiite majority to revolt, a charge that the Islamic republic denied.
Bahrain’s “geopolitical situation” is improving, Matar said. “The news in the region is very positive.”