GCC inclusion in JPMorgan's EMBI to attract inflows of $30 bln: BofAML

The potential inclusion of GCC countries in JPMorgan Emerging Market Bond Index (EMBI) will be a "swing factor" for regional credit, leading to an estimated $30 billion in inflows, Bank of America Merrill Lynch (BofAML) said in a new report.

The expected inflows are likely to lead to tighter spreads, making primary market access easier across the GCC region, it added.

Sovereign bonds of Saudi Arabia, the UAE, Kuwait, Bahrain and Qatar will make up a sizeable portion of the index.

"We estimate 10 to 11 per cent of the EMBI diversified. In theory, flows could reach $40 billion which should be supportive for credit performance in the coming months," the report said.

However, BofAML estimated that the "ultimate flow number would be lower" to $30 billion since many EMBI funds appear to already hold off-benchmark GCC sovereigns in their portfolios.

Besides, the inclusion will allow sovereigns to issue debt to a new audience of EM credit-focused investors, which should increase primary demand.

"These new sovereigns will be introduced gradually over an expected six-month period from 2019, although funds may well pre-empt the move in the coming months, particularly after a final decision is made by JP Morgan," the report said.

According to the report, Kuwait and Bahrain are likely to benefit from the EMBI diversified weighting approach that reduces the weight of the largest issuers relative to their amount outstanding.

Flows into large issuers such as Saudi Arabia and Qatar will be smaller in percentage of debt outstanding terms, it added.

In June, JPMorgan said it was planning to include sovereign debt from GCC in its widely tracked emerging market government bond index.