Tue, Aug 21, 2018 - Page 10 News List

Korean investors shift funds to Middle East

Bloomberg

South Korea’s yield-hungry investors, who were spooked by a Chinese default, are shifting their sights to the other end of the continent — to the Middle East.

One hot product is short-term securities backed by deposits at Middle East banks.

South Korean money managers increased such purchases 23 percent in the first half to 10.3 trillion won (US$9.18 billion), with Qatar making up the majority, data from Korea Investors Service showed.

Meanwhile, investments in products linked to Chinese bank deposits plunged 43 percent to 9.2 trillion won.

A default by China Energy Reserve & Chemicals Group Co (中國國儲能源) in May ruined demand for Chinese debt among Korean short-term investors, such as money market funds, because other bonds from the company had been repackaged into commercial paper sold in the South Korean market.

South Korean investors are looking instead at Middle Eastern bank deposits that typically offer better yields than local or Chinese banks.

Lenders in Qatar need funding, after a Saudi Arabia-led group of nations cut commercial links with the country last year.

Moody’s Investors Service said that risks faced by Qatar include a possible escalation of regional tensions that threaten to disrupt its hydrocarbon exports and pressure the country’s finances.

It might also get tangled up in Turkey’s troubles after pledging US$15 billion of direct investment in the country, Moody’s said.

Still, it raised Qatar’s “Aa3” rating outlook to stable from negative last month, saying that the country could withstand the economic, financial and diplomatic boycott by three neighboring countries and Egypt.

Middle East deposits “will likely continue to appeal to investors as they’re trying to get a bit more yield amid a low interest-rate environment at home,” said Kim Sun-ju, a credit analyst at SK Securities Co in Seoul.

In a report in June, Fitch Ratings said that while Qatar’s banking system relies on foreign funding and is exposed to a weak domestic real estate sector, it has remained sufficiently profitable to “absorb foreseeable pressure on funding costs and asset quality.”

The structured products backed by Middle Eastern deposits, sold through special-purpose vehicles created by South Korean brokerages, typically mature in six months to a year. They carry yields of about 2.4 percent for those with one-year maturity after hedging for currency moves. That compares with a 1.8 percent yield on similar-maturity won government debt.

Qatar National Bank QPSC’s deposits accounted for more than half of the deposits, followed by Doha Bank QPSC and Emirates NBD PJSC, KIS data showed.

Debt backed by the deposits of Qatar’s Al Khalij Commercial Bank PQSC was sold to investors in Korea for the first time this year.

China’s financial deleveraging campaign also reduced sales of the country’s deposit-backed debt in South Korea as lenders needed less funding for loans, said Taewoo Park, a credit analyst at Samsung Securities Co in Seoul.

“Middle Eastern banks filled the vacuum,” he said, adding that while Turkish volatility could affect investor sentiment, it is unlikely to develop into a credit issue.

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