Closing the Gulf: How the GCC Countries Fit into our Emerging Debt Investment Process

The inclusion of five Gulf Cooperation Council (GCC) countries as of January 2019 into the benchmark EMBIG index represents one of the largest onetime index adjustments in recent memory. By the time the GCC countries are fully phased into the benchmark later this year, they will collectively account for about a 12% weighting, from virtually zero. Inclusion of these countries will increase the overall credit quality of the benchmark, lower its yield, and increase its exposure to oil price fluctuations. We use this as an opportunity to remind readers of our country risk process, highlighting some of the unique characteristics of these countries, how they fit into our relative valuation framework, and what this important market development means for our external debt portfolios.

On January 31, 2019, J.P. Morgan, which manages the EMBI suite of emerging market bond indices, added five new countries of the Gulf Cooperation Council (GCC)1 to the external debt benchmarks. This addition represents the largest ever one-time adjustment to the index that our foreign currency sovereign debt funds have historically used as a benchmark. Therefore, we take this opportunity to make clients aware of the change, including how these countries fit into our country risk framework, and how they might fit into our portfolios.

Why and how?
According to data compiled by Bank of America, total sovereign and corporate bond issuance from the GCC has accelerated in recent years. Prior to 2014, when oil prices collapsed from their lofty levels well above $100 per barrel, gross bond issuance from the region averaged about $27 billion per annum. Beginning in 2016, after the realization that the oil price shock was going to be persistent rather than transitory, annual issuance has more than doubled to $66 billion. It is likely that the index provider was being pressured by a number of stakeholders to recognize this heightened level of issuance, which amounted to roughly 4-5% of the region’s combined GDP. To be sure, GCC countries drew down assets and tapped domestic pools of savings to offset the lower revenues from oil, but they also chose to borrow from foreigners in larger amounts, a rather unfamiliar feeling for a region normally accustomed to being a creditor.