The cost of insuring against sovereign debt defaults in the Gulf states has risen significantly over the past year, bucking the global trend, according to new research from Chaucer, a global specialty re/insurance group.
This increase comes despite an overall 15% decline in the cost of Credit Default Swaps (CDS) across 87 countries in the study.
Driven by a 22% drop in Brent Crude oil prices and heightened geopolitical tensions, several Gulf states have seen a marked increase in their CDS prices, the study noted.
Kuwait experienced the second largest percentage rise globally, with a 60% jump to 67.6 in 2023/2 from 42.2 on 202/23. Similarly, Saudi Arabia saw a 15% increase, reaching 60.9 in 2023/4 from 53.0 in 2022/3.
Qatar also recorded a 4% rise, moving to 40.8 in 2023/4 from 39.1 in 2022/3. According to the report, on average, the cost of CDS for the 87 countries in the study fell by 15% whereas for the Gulf states as a whole the cost of CDS has risen by an average of 15%.
The research also highlighted Israel as having the most significant CDS price increase internationally, with a 171% surge attributed to rising defence spending and a growing budget deficit.
Alvaro Conesa, Senior Analyst & Underwriter at Chaucer, stated: “The increase in Credit Default Swaps in the Gulf region shows how important the price of oil is to investor confidence in these governments’ ability to service their debt.
“When oil prices drop below a certain level, government deficits grow rapidly. This drives up the cost of insuring against defaults on their bonds.”
The fall in oil prices also raises concerns about the potential cancellation of government contracts as state finances deteriorate.
This has led to an increase in demand for contract frustration insurance, which protects businesses from losses incurred when a contract partner fails to fulfil their obligations.
Conesa warns that this trend is a worrying signal for businesses operating in the Gulf region, particularly in sectors like infrastructure, property, and construction, which are heavily reliant on government contracts.
If a government falls into economic difficulty, they are more likely to cancel or unilaterally amend corporate contracts to reduce their spending.
“Whilst sovereign bonds for Gulf states are far from distressed levels, the price of their CDS gives a clear signal,” Conesa adds. “Businesses know that their contracts with governments can be cancelled long before the country suffers credit downgrades.”
