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1.37 MB
Extraction Summary
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People
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Organizations
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Quotes
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Type:
Financial research report / market analysis
File Size:
1.37 MB
Summary
A page from a Merrill Lynch 'GEMs Paper #26' financial report dated June 30, 2016. The text analyzes the economic stability of Saudi Arabia, discussing Credit Default Swaps (CDS), bond yields compared to Qatar, and pressure on the Saudi Riyal (SAR). It highlights risks of devaluation, liquidity issues, and potential credit rating downgrades, supported by charts tracking market nervousness and swap spreads. The document bears a 'HOUSE_OVERSIGHT' stamp, indicating it was part of a document production for a congressional investigation.
Organizations (5)
| Name | Type | Context |
|---|---|---|
| Merrill Lynch | ||
| BofA Merrill Lynch Global Research | ||
| Bloomberg | ||
| SAMA | ||
| House Oversight Committee |
Locations (3)
| Location | Context |
|---|---|
Key Quotes (4)
"The Qatar 10-year sovereign bond currently trades at yields of 3.0%."Source
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Quote #1
"Saudi CDS has been trading c65bps wider of Qatari CDS, which would suggest a 10-year Saudi bond yield of c3.65%."Source
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Quote #2
"Hedging against SAR devaluation risks remains strategically attractive given the risk-reward ratio."Source
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Quote #3
"SAMA has already intervened through macro-prudential tools and may do so again if needed."Source
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Quote #4
Full Extracted Text
Complete text extracted from the document (1,986 characters)
useful and relevant pricing benchmark in this regard, in our view. The Qatar 10-year sovereign bond currently trades at yields of 3.0%. However, Saudi CDS has been trading c65bps wider of Qatari CDS, which would suggest a 10-year Saudi bond yield of c3.65%. Current CDS spread levels suggest potential for some notch downgrades from Saudi Arabia’s current rating, as the market prices in issuance risk, volatile oil prices, hedging flows relative to the USD peg and the banking sector off-balance sheet wrong-way exposure risk.
Saudi forwards, rates and CDS remain under pressure
Domestic rates are under pressure with the 5y IRS spread over US at historically elevated levels due to structurally tighter liquidity. Budget consolidation could help take some of the pressure off as it would imply lower debt issuance needs. However, it would also imply lower deposit formation in domestic banks as fiscal retrenchment will impact private sector economic activity. Greater risk premium, issuance pressures and tighter liquidity will also keep CDS spreads elevated until oil recovers.
Domestic rates are under pressure with the 5y IRS spread over US at historically elevated levels due to structurally tighter liquidity. Budget consolidation could help take some of the pressure off as it would imply lower debt issuance needs. However, it would also imply lower deposit formation in domestic banks as fiscal retrenchment will impact private sector economic activity. Greater risk premium, issuance pressures and tighter liquidity will also keep CDS spreads elevated until oil recovers.
Hedging against SAR devaluation risks remains strategically attractive given the risk-reward ratio. Data suggest a strained backdrop for external and domestic liquidity reflecting the combination of private sector dollarization, possible capital outflows, weakening deposit formation and the move higher in interbank rates. However, SAMA has already intervened through macro-prudential tools and may do so again if needed.
Chart 32: Market remains nervous on Saudi Arabia
[Chart showing Implied appreciation in 1-yr SAR fwd (%) vs Oil prices (US$/bbl, rhs) from Jan-97 to Jan-16]
Source: Bloomberg BofA Merrill Lynch Global Research.
[Chart showing Implied appreciation in 1-yr SAR fwd (%) vs Oil prices (US$/bbl, rhs) from Jan-97 to Jan-16]
Source: Bloomberg BofA Merrill Lynch Global Research.
Chart 33: A pronounced increase in SAR swap spreads vs USD
[Chart showing Spread (rhs), SAR 5yr swap, and USD 5yr swap from Jan-02 to Jan-16]
Source: Bloomberg BofA Merrill Lynch Global Research.
[Chart showing Spread (rhs), SAR 5yr swap, and USD 5yr swap from Jan-02 to Jan-16]
Source: Bloomberg BofA Merrill Lynch Global Research.
Merrill Lynch
GEMs Paper #26 | 30 June 2016 35
HOUSE_OVERSIGHT_016145
GEMs Paper #26 | 30 June 2016 35
HOUSE_OVERSIGHT_016145
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