Dubai’s Islamic bond gains are showing that investors are downplaying an International Monetary Fund warning that the emirate’s real-estate industry is at risk of another bubble.
Dubai’s 6.45% sukuk yield fell 54 basis points in July, the most in 13 months, to 5.19%. That was twice the monthly drop to 3.79% in the average yield on Gulf Co-operation Council debt tracked by HSBC/Nasdaq Dubai’s GCC US Dollar Sukuk Index.
The IMF urged Dubai to consider levying higher charges on real estate to generate more revenue and prevent the industry from “overheating,” according to a July 30 report. Home prices in Dubai have risen 28%, on average, this year, Cluttons data shows. A property crash spurred by the 2008 global credit crisis drove Dubai to the brink of default almost four years ago, before it was rescued with a $20bn bailout from Abu Dhabi and the United Arab Emirates central bank.
“I wouldn’t ring alarm bells at this stage,” Yaser Abushaban, executive director of asset management at Emirates Investment Bank PJSC, said by phone July 30. “While the issues the IMF outlined are valid, none of them are ground breaking or unknown to the markets, and therefore are already priced into the bonds.”
Confidence in Dubai, home to the world’s tallest tower, has improved since state-linked companies refinanced or paid $3.75bn of debt last year. Government-related companies are also selling assets to meet their financial obligations. Dubai Financial Group signed an agreement last week with BIMB Holdings to sell its 30.5% stake in Bank Islam for $550mn, while Dubai Holding plans to divest its 35% stake in Tunisie Telecom. An upturn in domestic real estate sales has coincided with a recovery in the economy, which expanded 4.4% last year, the most since 2007 amid a revival in tourism and retail, according to government data. Dubai has unveiled at least $40bn of new projects this year, without providing details on how these will be financed.
Dubai’s credit default swaps, contracts insuring the nation’s debt against default, declined 105 basis points in the past 12 months to 220 on August 2, compared with an average 17 basis-point decline to 290 for Middle East and North Africa contracts.
The government isn’t out of the woods. The IMF recommended that authorities ensure the execution of major projects takes place in a “gradual and structured” fashion to limit risk-taking among government-related enterprises, known as GREs.
Unlike neighbouring Abu Dhabi, the richest of the seven emirates that make up the UAE, Dubai isn’t rated and oil contributes less than 2% to gross domestic product. Dubai and its GREs have $30bn of debt maturing next year, and $142bn in total, IMF estimates show.
“No one, be they Dubai Inc borrowers or investors, can afford to be complacent about Dubai Inc’s debt situation, period,” Chavan Bhogaita, head of markets strategy at National Bank of Abu Dhabi PJSC, said by e-mail last Monday. “It is still a situation that warrants careful scrutiny and monitoring.”
Continued appetite for the emirate’s debt is driven by expectations that Dubai will manage to sort through impending maturities. Nakheel, the developer that heightened Dubai’s default risk in 2009, expects to sign an accord with banks to extend the maturity by eight years from 2015 on 8bn dirhams ($2.2bn) of debt, a spokeswoman said in June.