UAE too wealthy for EM status, JPMorgan says, with plans to remove it from EM bond index

UAE debt outgrows emerging market label: JPMorgan will phase the UAE out of its flagship emerging market bond index (EMBI) in four stages starting 31 March, with a final exit by June, Bloomberg reports, citing a statement from the index provider.

Why? The decision comes after three straight years of the UAE exceeding the bank’s wealth threshold — typically measured by gross national income per capita — effectively graduating the sovereign from the EM asset class. The UAE currently accounts for 4.1% of JPMorgan’s global EM bond indices.

This is not a downgrade: The UAE’s AA-rated credit long sat outside the emerging cluster of B-to-BBB peers in the index. “The market has already been treating the UAE as a high quality credit,” Sarah Alyasiri, financial strategist at CF Trade, tells EnterpriseAM, adding that Emirati sovereign bonds have been trading far closer to investment-grade credit than to the broader EM hard-currency complex.

We knew it was coming: This time last year, JPMorgan made the same move for Qatar and Kuwait, signaling that GCC assets are increasingly viewed as developed or high-grade investments rather than traditional EM debt. Investment bankers have been saying it for a while now: the GCC is looking less like an emerging market and more like a category resting between EMs and developed markets, thanks to reforms that have helped broaden the investor base and deepen liquidity.

The UAE’s exit will leave the remaining EM index riskier. JPMorgan analysts expect the headline EMBI spread to slightly widen by 10 bps once the Emirati bonds’ lower yields are removed from the average.

SOUND SMART- The headline spread is the extra return investors ask for to take the added risk of lending to emerging market countries when compared to the US government. Right now, that extra risk premium is about 247 bps on top of what US Treasuries pay, whereas the spread on the UAE’s bonds is currently at about 65 bps, according to the news outlet.

What changes?

Some capital may rotate within the GCC toward sovereigns that remain in EM indices, Alyasiri noted. At the same time, the reclassification could open the door to global investment-grade and core fixed-income managers who previously had limited mandates to hold EM debt.

In the near term, the impact is largely technical. EM-dedicated funds that track the index will need to trim exposure as the UAE is phased out, Alyasiri tells us. But because the removal is staggered over four stages, “the adjustment is likely to be smooth.” It’s also likely to be already priced in, she added.

The graduation premium: If the move supports structurally tighter spreads, it would strengthen the UAE’s ability to finance long-term infrastructure and strategic development plans at a lower cost of capital, Alyasiri said, reinforcing the fact that this is a pricing and structural shift, not a negative credit event.