JPMorgan Chase & Co. reclassified Qatar and Kuwait as developed markets and will soon start their removal from its Emerging-Markets Bond Index in a phased manner. It also said the United Arab Emirates may be taken out of the cluster next year.
The elimination of Qatar and Kuwait from EMBI will take place over six months starting with the month-end rebalancing on March 31, JPMorgan’s Global Index Research team said in a statement. From now on, new bond issues from these markets won’t be included in the EM index, JPMorgan said. That includes two benchmark-sized sovereign dollar bonds being sold by Qatar on Thursday.
JPMorgan’s emerging-market universe is widely tracked by investors and the loss of the two investment-graded countries could increase the average risk in the asset class. The extra yield investors demand to own EM sovereign bonds rather than US Treasuries would widen by 11 basis points, JPMorgan said. Qatar has a weighting of 3.2% and Kuwait 0.6% in the EMBI Global Diversified grouping, with UAE accounting for another 4.1%. Their removal would also shift capital flows out of emerging markets, and narrow the opportunities for bond traders.
“As investors we were waiting for this to happen,” said Anders Faergemann, co-head of EM global fixed income at Pinebridge Investments in London. “On paper, the investor base for Qatar and Kuwait will narrow by taking them out of the EM indicies but we can still invest in both countries off benchmark.”
Qatar’s dollar bonds have handed investors 0.8% total returns this year. The country’s sovereign spread over Treasuries is about 67 basis points, compared with an EM-wide average of 317 basis points, marking it as one of the least risky developing nations for bond investors. The reclassification may potentially spark flows into the country from developed-market bond investors.
“This is a very healthy credit with a current account surplus - any external issuance won’t be a concern,” Faergemann said. “we have argued for a while now that Qatar was a DM credit.”
However, the country expects to turn in a fiscal deficit this year. Sheikh Tamim bin Hamad al Thani approved a budget in December that set the deficit at 13.2 billion riyals ($3.62 billion), to be partly funded by external borrowing. The country also has a $2 billion bond maturing in April.
Kuwait has shut itself out of international bond markets since 2017 due to the lack of a public debt bill resulting from political wrangling. But this year, investors expect the sovereign to issue debt under a new law that enables the government to raise up to $65 billion over 50 years.
As for the UAE, JPMorgan said the nation’s cost-of-living ratio has exceeded the EM index threshold for two consecutive years. If the country exceeds threshold in 2026, the market will no longer be eligible for the EMBI series and will be reviewed for removal in a phased manner.
