Not so long ago the Middle East bond market was largely a steady progression of five year dollar benchmarks. It was a simpler time. Oil prices were high, new issue premiums were low, and a regional investor base flush with liquidity didn’t think too hard about where to put its cash. Banks bought banks, friends bought friends and everyone had a good time.
Now oil prices are low, premiums are elevated and, although the regional investor base isn’t short of few bucks, selectivity is spreading fast. Things will only get more interesting as the months roll on.
The sovereigns are going to start issuing bonds to plug budget deficits, whether in dollars or local currencies. The sovereigns will also stop writing cheques to government related enterprises, forcing them into the markets. Banks won’t have access to cheap liquidity from sovereign oil revenues, and won’t be lending as much to the corporates. Both will, at the margin, have to issue more bonds.
That means more volume from the region and a bigger role for bond teams. They will have harder questions to answer, as well as more bonds to execute, and so can be of more use to their clients.
How much sovereign issuance can the banks digest? How much bank issuance can the regional investor base handle? What happens if certain GCC states end up with a junk rating? Will Islamic appetite for African sovereign sukuk still be there? Debt bankers who used to struggle to raise enthusiasm about Middle East deals now think it’s fascinating, because it's no longer obvious.
The Middle East part of the awkward CEEMEA acronym is getting interesting just in time, because central and eastern Europe is no longer the fertile emerging markets hunting ground it once was.
Poland, Slovenia, Latvia and most recently, Lithuania, have moved firmly into the territory of rates buyers and SSA accounts. They have the high ratings and low coupons to prove it, and they are a way to add juice to a portfolio of western European government bonds, not a true emerging markets play.
Yield-chasing emerging market buyers just aren't interested any more, and neither are CEEMEA bankers. With Russia offline for the foreseeable future, and supply suffering, emerging markets desks have no desire to see a Latvian 10 year led by their SSA colleagues.
But the uncertainty that makes CEEMEA interesting — and justifies emerging market fees — seems to be absent from the higher rated CEE sovereigns. With European bond yields still close to record lows, the trend seems set to continue. So as CEE sovereign spreads sink lower and the market becomes more staid, at least there’s a little more uncertainty to spice things up.