Saudi CDS dips to 6-month low on improved investor perception

The cost of insuring exposure to Saudi Arabian sovereign debt has declined to the lowest level since March, according to figures compiled for Argaam by Thomson Reuters.

Data from June 2017 until Sep 17 2018 show that the five-year credit default swaps (CDS) for Saudi Arabia declined four basis points (bps) to 79.81 bps on Monday from Friday’s close of 83.25 bps, the lowest level since mid-March.

Data from IHS Markit shared with Argaam also showed that 5-year CDS spread for Saudi Arabia closed the day on Friday at 78.66 bps, lowest since March 19 close. The intraday pricing dipped as low as 77.85 bps, IHS Markit said.

CDS, in its most basic terms, is basically an insurance against credit risk and an indicator of sovereign risk. CDS is negotiated privately as a bilateral contract, wherein the premium (spread), maturity, and other terms are pre-specified. The buyer of contract makes periodic fee payment to the seller, in exchange for a guarantee that if a bond goes into default, the seller of protection will provide compensation.

This way CDS contracts can reduce risks in bond investing by transferring risk from one party to another without transferring the underlying bond. CDS spreads (expressed in basis points or bps) indicate how the market or investors rate creditworthiness. The wider the spreads, the greater is the risk perceived.

In other words, falling spreads suggest the perceived risk of default is falling whereas rising spreads indicate the perceived risk of default is rising.

Analysts attribute this decline in CDS spread to improving investor perception among global investors.

"The decline in CDS signals the improving perception of Saudi Arabia among global investors as the Kingdom has unveiled a series of economic and equity markets reforms," Anita Yadav, Head of Fixed Income Research, Emirates NBD Bank, told Argaam.

“The Kingdom has won MSCI and S&P Dow Jones Indices emerging market status, and next year Tadawul is expected to be included in the FTSE Russell emerging market index. These reforms have triggered renewed investor confidence in Saudi equities and bonds, leading to the reduction in risk perception, as reflected in lower CDS spread,” she said, adding, “Besides equities, Saudi bonds are also likely to be included in the EM bond index, which will increase the demand for Saudi bonds.”

Another reason, she said, is the rising oil price that is expected to bring down Saudi budget deficit, thereby bringing down investors’ perceived risk of government defaulting on its sovereign bond.

“All in all, the improving Saudi economy is helping building a positive environment among investors, that’s bringing down the CDS spread," she added.

Write to Sunil Kumar Singh at sunil.kumar@argaamplus.com