Oil price turmoil weighs heavy on African, Gulf Eurobonds

Tumbling oil prices and market convulsions in China pushed yield premiums on African Eurobonds to record highs on Monday while Gulf bond prices also fell, reflecting expectation of hardship ahead for commodity-exporting economies.

Yet more steep losses on Chinese equity markets were the focal point for uneasy emerging market investors. On oil markets, prices are within sight of 12-year lows around $32 a barrel as investors’ hopes of economic recovery fray and traders ramped up bets on crude prices falling further.

“If oil prices remain at current levels for the rest of the year, we will be around 40 percent below the 2015 average Brent future price of $54 per barrel, raising the stakes even further for all commodity exporters,” said Simon Quijano-Evans, chief EM strategist at Commerzbank.

Having anticipated oil prices above current levels, that could leave many countries struggling to finance budget deficits.

African hard-currency bond yield spreads – the premium investors demand to hold debt over U.S. Treasuries – hit a record high of 620 basis points on Monday, according to data calculated by JPMorgan.

Gabon, which generates more than 40 percent of government revenues from oil, has seen some of the biggest moves, with spreads widening 114 bps or almost 15 percent since Dec 31, including a 21 bps rise on Monday.

Fellow oil producer Ghana – until recently one of Africa’s star economies but now under an International Monetary Fund (IMF) aid programme – has seen spreads blow out 15 percent to 1113 bps while those in Zambia, its second largest copper producer, are up more than 12 percent at 1,119 bps.

Spreads for all three countries are at their highest since 2009.

Bond prices also fell across the continent, with Gabon’s 2024 dollar-bond, Ghana’s 2026 issue and Zambia’s 2027 bond all trading at record lows in the low to mid-70s cents in the dollar range, according to Tradeweb data.

The picture was similar across the Middle East.

While Saudi Arabia has no sovereign Eurobonds outstanding, the 2018 bond issued by state-controlled Saudi Basic Industries Corp (SABIC), one of the world’s largest petrochemicals groups, traded at its lowest since end-2013.

Dollar-denominated bonds of fellow OPEC member Qatar are trading at multi-months low across the curve.

The IMF estimated in October that, to achieve fiscal breakeven in 2015, Qatar needed an oil price above $50 per barrel while Saudi Arabia, the world’s largest crude exporter, required above $100.

“If oil prices remain at current levels for the rest of (this) year, they will be around a third of the required price to bring balanced budgets in Saudi Arabia, Bahrain and Oman for example,” said Quijano-Evans.

To address a record deficit, Saudi Arabia announced in late December a 2016 budget plan with spending cuts, reforms to energy subsidies and a drive to raise revenues from taxes and privatisation.

The government did not disclose the average oil price assumed in its 2016 budget calculations, but economists estimated it was about $40 a barrel.

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