UAE, Saudi Arabia likely to be reclassified as developed markets
The UAE and Saudi Arabia have demonstrated significant economic growth and financial maturity, warranting their reclassification from the Emerging Market Bond Index to developed market status, similar to Kuwait and Qatar, analysts say. This change would better reflect their robust economic profiles, characterised by low sovereign risk, tight spreads, and market maturity.
'Both UAE and Saudi have diversified their economies beyond oil, investing in infrastructure and technology, leading to stable growth and enhanced financial resilience. Their high sovereign credit ratings and tight bond spreads indicate strong investor confidence and market stability. Reclassifying the UAE and KSA as developed markets, and Oman and Bahrain as emerging markets, would acknowledge their achievements and attract a broader range of investors, further supporting their global standing and continued growth,' Meshal AlFaras, Head of Middle East, Africa and Asia at Janus Henderson, told Khaleej Times in an interview.
There are some very clear requirements to be included in benchmark indices (the typical one being JP Morgan's EMBI global diversified). After broader inclusion of rich Middle Eastern countries in the benchmark during 2019 countries are now starting to exit because they are surpassing the income limit to be an emerging market. 'Therefore, Qatar and Kuwait are already exiting the benchmark and if the current cost of living in UAE remains at the same level next year, can also depart from the benchmark,' Thomas Haugaard, Janus Henderson's portfolio manager on the emerging markets debt hard currency, added.
The current volatility in global oil markets due to ongoing geopolitical events are unlikely to affect the GCC countries, the analysts said. 'Most of the major energy exporters are highly rated, which means that they have solid access to market funding and are generally seen as resilient in times of financial market stress. As long as oil prices stay within reasonable ranges over the longer term, these sovereigns are alright. It is a bit more challenging for higher-cost producers and smaller frontier countries (eg. In Sub-Saharan Africa),' Haugaard said. Overall, from an asset class perspective, it is worth noticing that more than half of the investment universe in emerging markets debt hard currency are net importers of energy, and therefore benefitting from falling oil prices. 'As recent events clearly show, movements in the oil price are very sensitive to geopolitical turmoil, and the recent escalation of the conflict between Israel and Iran has pushed oil prices higher,' Haugaard added.
While oil price fluctuations can strain public finances in many emerging markets, GCC nations such as the UAE benefit from robust fiscal buffers and active debt management strategies. The UAE, for example, continues to attract strong demand for its sovereign bonds, supported by high credit ratings and a diversified funding approach. 'Data shows that non-oil sectors contribute around 75 per cent of UAE's GDP, a strong indicator of economic diversification. Major non-oil sectors include real estate, tourism, aviation, logistics, finance, trade and renewable energy,' AlFaras said.
Historically, oil prices have been in the range of $50-80 per barrel under stable global demand and moderate supply growth, which is a quite comfortable range for countries in the region given low all-in costs. The UAE is well known for its proactive economic planning and sizable sovereign wealth assets. Despite oil price fluctuations, the government has maintained investment in infrastructure and diversification programmes, helping to sustain investor confidence and macroeconomic stability. The same applies to other GCC Countries such as Kuwait, Qatar and Saudi and the best way to cover any potential shortfall in the fiscal budget is to tap into the debt market for the main infrastructure and giga projects, AlFaras said.
With most of the global policy uncertainty emanating from the US ,there are signs that financial markets are rethinking the US as a safe-haven. During a short period in April after the US announcement of broad-based tariffs, financial markets experienced a simultaneous sell-off in US equities, US bonds and the US dollar, indicating a disruption in the traditional safe-haven behaviour of financial markets. 'While part of that re-think is of more tactical nature, having realised too much exposure to US assets, there is also likely a structural rethink that can benefit the rest of the world in terms of attractive capital flows. Even as global growth is slowing alongside a slowing US economy, we have seen US dollar weakness that has given more space to ease monetary policy to support slowing economies,' Haugaard said.
The rethink about US exceptionalism caused a potential disruption of the traditional safe-haven behaviour which has historically amplified the negative impact on emerging markets from risk aversion in global markets. Hence, emerging markets are proving very resilient in this otherwise uncertain environment.
AlFaras expects interest rates will stay higher for longer and will not go back to where they were over the last decade. 'In the GCC, and particularly the UAE, dollar pegs can help reduce currency volatility, which supports foreign investor appetite. Despite global headwinds, the UAE's stable macro framework and investment-grade profile make it resilient compared to many other emerging markets,' he added.
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