JPMorgan Chase & Co. is considering adding Saudi Arabia’s local-currency bonds to its benchmark emerging-market index, according to people familiar with the matter, a move that would help the kingdom attract more foreign portfolio investment and fund huge projects to diversify from oil.
(Bloomberg) — JPMorgan Chase & Co. is considering adding Saudi Arabia’s local-currency bonds to its benchmark emerging-market index, according to people familiar with the matter, a move that would help the kingdom attract more foreign portfolio investment and fund huge projects to diversify from oil.
The Wall Street bank has placed Saudi Arabia under review for inclusion into the Government Bond Index-Emerging Markets, a suite of indexes tracked by roughly $236 billion of funds.
The kingdom is keen to join and its regulators are working to make sure the bonds are eligible for inclusion, said the people, who asked not to be identified because the matter is confidential.
JPMorgan and the Saudi Tadawul exchange declined to comment.
Saudi Arabia is spending hundreds of billions of dollars on a diversification drive championed by Crown Prince Mohammed bin Salman and dubbed Vision 2030. While part of that will be funded by oil revenue, the government also needs to attract more foreign investment and borrow.
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The country is investing in everything from new cities to tourism resorts and electric vehicles. On Wednesday, it said it planned to bid for the men’s football World Cup in 2034.
The potential inclusion could boost the liquidity of Saudi government securities and attract more passive funds, which often track indexes such as JPMorgan’s. That would be a welcome boost for the kingdom, given it’s struggling to attract significant foreign direct investment or overseas flows into its debt market.
China has the biggest weighting in the GBI-EM indexes. Other countries include Brazil, Malaysia, Mexico, Poland, South Africa and Turkey. Last month, JPMorgan announced that India would gain entry in June next year.
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The India move will see it attract $40 billion of inflows, Goldman Sachs Group Inc. estimates.
Bloomberg LP is the parent company of Bloomberg Index Services Ltd., which administers indexes that compete with those from other service providers.
The chairman of the Saudi Capital Market Authority, Mohammed A. El-Kuwaiz, said last month there are several developments coming that “we expect are likely to stimulate the debt market even further.”
The Saudi riyal debt market is dominated by local funds, with many foreign investors deterred by a lack of liquidity. Yields are also low compared to those of many other emerging markets, in part because the riyal is pegged to the dollar, meaning the central bank has to closely track the Federal Reserve’s moves. It’s also down to Saudi Arabia, the world’s biggest oil exporter, having a high credit rating.
What Bloomberg Economics Says…
The inclusion of Saudi Arabia into the JPMorgan index will bring in passive foreign funds. When oil prices are high, and the kingdom is running a trade surplus, the funds are likely to be recycled as investments abroad. But when oil prices drop, these inflows could prove useful in funding potential trade deficits.
— Ziad Daoud, chief emerging markets economist.
The US bank has created a Saudi-only local debt benchmark index — known as the “JPMorgan Saudi Arabia sukuk bonds unhedged LOC” — to help investors track the performance of the kingdom’s securities. That’s a step toward joining the emerging-markets indexes, said the people. It would also help authorities measure the performance of local asset managers, including pension funds.
Saudi Arabia was added to JPMorgan’s EMBI Global Diversified Index for its dollar denominated bonds in 2019. Moody’s Investors Service rates its foreign debt as A1, the fifth-highest rating, with a positive outlook.
This week, the Finance Ministry rewrote its budget forecast for next year, saying it expects a deficit instead of a surplus as it ramps up spending and as the government cuts oil production to help boost prices.
The $1.1 trillion economy will narrowly avoid a contraction this year, according to the government forecasts. That’s more optimistic than Bloomberg Economics, which expects the Saudi government’s oil supply cuts to shrink gross domestic product by about 0.7%, in what would be a major swing for a country that had the fastest-growing economy in the Group of 20 in 2022.
The budget deficit in the first half of this year was funded entirely with financing from external borrowing.
–With assistance from Netty Ismail and Srinivasan Sivabalan.
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