Qatar develops as bond markets change

Gulf nations are acquiring developed market status as more advanced nations further increase their debt. The bond markets are signalling profound shifts in the global economyIn a highly significant move, Qatar has been upgraded in category from emerging market to developed market, by the investment bank JP Morgan Chase & Co, along with Kuwait. The bank announced that the two Gulf nations will be removed from its Emerging Markets Bond Index in a phased manner, over a six-month period beginning end-March. The bank will consider the same reclassification for the United Arab Emirates next year. It is possible that the higher ranking for Qatar and Kuwait will be followed by other index providers.At around the same time, in mid-February, Qatar concluded a heavily over-subscribed bond issuance on two tranches. A $1bn tranche maturing in three years carries a coupon rate of 4.5%, while a $2bn tranche maturing in 10 years has a coupon rate of 4.875%. The rates represent respectively 30 basis points and 45 basis points over 10-year US Treasuries. This represents a tightening by 30 and 35 basis points respectively compared with the Initial Price Target (IPT). The issuance was 5.8 times over-subscribed; orders topped $17bn.The ability to attract such high demand even after tightening the price, along with the upgrading to developed market status, is a fair reflection of the economic progress the state has made across a range of issues: Not just fiscal responsibility, but infrastructure improvements, developing a sound tax base, and strengthening export earnings through the expansion of extraction from the North Field gas reserves.Qatar had become an outlier in terms of its strong fiscal position not only within emerging markets, but more widely. Its public debt is below 50% of GDP, and has been progressively reduced since the Covid-19 pandemic and the investment for the 2022 FIFA World Cup.By contrast, the proportion of public debt to GDP is around 100% or higher for some developed nations, notably France, the UK and the US. If an emerging economy had such high debt levels, this would potentially result in strict measures being imposed by the IMF, and difficulty in finding investors for bond issuance, risking default. In part, the richer nations can continue to sustain this owing to the depth and liquidity of their capital markets, strong tax base and diversified economies, but there are signs this year from the bond markets that no government can be complacent.Central banks have reduced interest rates, which normally would cause yields on government bonds to fall, but this has not consistently been the case. Mortgage rates have not fallen either. Investors are anticipating higher inflation, and interest rate levels that may stay the same or even be increased. The average fiscal deficit across the G7 countries for 2025 is 6% of GDP; the US is expected to issue bonds totalling 7% of GDP, which amounts to $2tn. The largest economies have also engaged in quantitative tightening, meaning more investors have to be attracted to bond issuances.These are colossal sums. Will the confidence hold? Probably: The debt levels were as high or higher during the Second World War, while inflation and interest rates were much higher in the 1970s and 1980s, which caused investors to shun government bonds.China and Japan have been reducing their exposure to US Treasuries, and several central banks, notably that of China, have been buying gold. For the foreseeable future, however, the shifts are not sufficient in scale to cause a major spike in yields or a collapse in confidence, given the depth and liquidity of the capital markets, growth prospects for the US and the dollar’s status as the world’s reserve currency. There are concerns, nonetheless, about the potential impact of tariffs and tax cuts by the Trump administration, and little sign that the fiscal deficit will be reduced. There is pressure on all western governments to increase defence spending owing to geopolitical tensions.But while a spectacular default by a major economy is unlikely – although bond investors did force a U-turn and a change in Prime Minister in the UK in late 2022 – what the dynamics reveal are a shifting economic world order, in which some emerging markets are beginning fully to emerge as developed economies, and with lower debt than the largest western economies. The changes may not be sudden, but they are profound.The author is a Qatari banker, with many years of experience in the banking sector in senior positions.