BofA Merrill Lynch release report - Emerging Convictions: A commodity-ruled market.
Bank of America Merrill Lynch have released their recent report titled 'Emerging Convictions: A commodity-ruled market' dated 12 April 2016 authored by the Global Commodities team at Bank of America Merrill Lynch.
"We have an Marketweight recommendation on Abu Dhabi EXD. Abu Dhabi's external debt is tightly held due to its scarcity value. The sovereign's balance sheet remains robust nevertheless with a large stock of foreign assets, despite fiscal deterioration. Downside risks are a prolonged period of low oil prices, regional geopolitical threats, and inability to implement sufficient fiscal consolidation. Upside risks are a rebound in oil prices, improved local liquidity and more vigorous fiscal consolidation to slow drawdown of foreign assets.
"We have a Marketweight recommendation on Bahrain EXD. Bahrain's EXD is already pricing in a downgrade to junk. However, it benefits from a perceived Saudi put and a local bid at the short end of the curve, which mitigates fiscal vulnerabilities. Downside risks are persistently low oil prices further pressuring external and fiscal accounts, deeper than expected rating downgrades and lack of Saudi support.
"We have an Underweight recommendation on Dubai EXD. We find Dubai's EXD at tight spreads given still-high leverage and refinancing challenges and we expect the local bid on the shorter-end to weaken due to low oil prices and supply risk. Downside risks are a prolonged period of low oil prices, regional geopolitical threats, loss of competitiveness due to stronger $, material domestic liquidity tightening, real estate collapse, increased borrowing for projects with low return and global risk aversion, which may cut market access to Dubai Inc. Upside risks are the Iran-P5+1 Deal, which could boost trade activity in Dubai.
"Valuation remains expensive on a ratings-adjusted basis due to the perceived GCC put and robust local bid in parts of the curve. Spreads are pricing in macro improvement following reforms and low oil prices that ease fiscal strains, but have now started to adjust. Politics (transition, governance and security) and a domestic run on EGP are risks. The socioeconomic impact of fiscal reforms, EGP weakness, failure to mobilise sufficient external financing or GCC aid and fiscal consolidation slippage are negative risks. Adoption of supportive macro policies, potentially as part of an IMF program, would provide upside risk.
"We have a Marketweight recommendation on Qatar EXD. Given the country's still strong balance sheet and the lack of strong directional catalysts, bonds are likely to continue to trade generally in line with USTs. Downside risks are geopolitics, a more competitive or oversupplied LNG market and lower hydrocarbon prices. Losing World Cup 2022 hosting rights would be nominally credit positive because it would lower fiscal spending and force efficient capital use."
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|Date:||Apr 17, 2016|
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