JPMorgan will reclassify Kuwait and Qatar as developed markets and will soon begin their phased removal from its Emerging Markets Bond Index, from which the United Arab Emirates might also be removed next year. 

The US-headquartered lender’s EMBI tracks the performance of emerging market bonds — debt issued by countries with developing economies. These bonds typically carry higher risk but offer investors higher returns. The EMBI is closely followed by investors worldwide.

In a report released Thursday, JPMorgan’s Global Index Research team said that Kuwait and Qatar will be removed from the EMBI in phases spanning a six-month period starting from March 31. The bank said that new bond issuances from these countries will no longer be included in the index.

The change will affect two bonds Qatar sold on Thursday through the Ministry of Finance: a three-year $1 billion bond priced at Treasuries +30 basis points, with a profit rate of 4.50%, and a 10-year $2 billion bond priced at UST +45, with a profit rate of 4.875%.

Qatar’s US dollar bonds handed investors 0.8% in returns this year, Bloomberg reported. When compared to other emerging market bonds, Qatar’s sovereign spread over US Treasuries is around 67 basis points, compared to the emerging market average of 317, meaning that Qatari bonds are lower risk compared to other emerging market sovereigns.

Meanwhile, the bank said that the UAE’s cost-of-living ratio has exceeded the EMBI’s average for two years running, and if the Gulf state scores higher again in 2026, it will also be reviewed for removal from the list.

“As investors we were waiting for this to happen,” Anders Faergemann, co-head of emerging market global fixed income at UK-based Pinebridge Investments, told Bloomberg. “On paper, the investor base for Qatar and Kuwait will narrow by taking them out of the EM indices but we can still invest in both countries off benchmark.”

“This is a very healthy credit with a current account surplus — any external issuance won’t be a concern,” Faergemann added, saying that he had been making the case for Qatar to become a developing market credit for a while.

Why it matters: The JPMorgan emerging market cluster is closely watched by many investors and the loss of two investment-graded sovereigns will increase the average risk for the asset class.

As of Jan. 31, 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 shift capital flows out of emerging markets and reduce opportunities for bond traders. 

The US bank said the extra yield that investors demand to own emerging market bonds instead of US Treasuries — the benchmark safe haven asset — would widen by 11 basis points.

Know more: Despite the move from emerging to developing markets, both Kuwait and Qatar are projecting deficits for 2025.

Qatar approved a budget in December that projected a deficit of 13.2 billion riyals ($3.62 billion). However, last year, analysts from the Moody’s Ratings agency said that the significant improvement in Qatar’s financial metrics between 2021 and 2023 will be maintained in the medium term due to the government’s fiscal prudence and the country’s planned expansion of liquified natural gas slated for 2026 to 2028.

Kuwait’s government said on Feb. 3 that it projects its budget deficit to rise by 11.9% to 6.31 billion dinars ($20.4 billion) for the fiscal year 2025-2026, up from the 5.6 billion-dinar ($18.2 billion) shortfall estimated for the current fiscal year.

Bloomberg reported on Jan. 30 that Kuwait may be able to sell debt for the first time since 2017, with the Council of Ministers set to approve a decree allowing the country to raise $65 billion over 50 years. Kuwait’s previous debt law expired eight years ago and was not renewed due to tensions between the government and parliament around the OPEC member’s heavy revenue reliance on oil prices and the resulting volatility. 

But Kuwaiti Finance Minister Noura Al-Fassam told local media on Sunday that the debt law was “now in its final stages” and will help the country further develop infrastructure projects and support its capital expenditure.