Bloomberg/Dubai
Dubai’s Islamic bonds are dropping more than the debt of energy-rich Abu Dhabi and Qatar as investors shun the region’s riskier assets after slowing global economic growth crimps oil demand.The extra yield investors demand to hold Dubai’s 6.396% bond maturing 2014 and the five-year 2.375 Treasury due the same year widened more than 100 basis points, or 1 percentage point, from its May 19 low to 446 basis points on Monday. The gap between Islamic bonds in the Gulf, home to about a third of the world’s oil reserves, over those in emerging markets rose six basis points in the past month to 36 on September 9, according to the HSBC/Nasdaq Dubai GCC US Dollar Sukuk Index and the HSBC/Nasdaq Dubai US Dollar Sukuk Index.“The short answer is that Dubai sold off in recent weeks as a result of global de-risking,” Ahmad Alanani, Middle East director at Exotix Ltd, said in an e-mail on Thursday. “Investors sold Dubai and bought the perceived safe haven bonds of Abu Dhabi and Qatar.” Dubai’s bonds make up about a quarter of the HSBC/Nasdaq GCC index.Dubai and its state-owned companies must repay about $31bn by the end of 2012 after the emirate racked up $113bn to transform into a tourism, trade and financial services hub, the International Monetary Fund estimates. Abu Dhabi, which bailed out its neighbour in 2009, holds more than 90% of the UAE’s oil reserves, while Qatar is the world’s biggest exporter of liquefied natural gas.Crude oil traded in New York fell 11% this quarter to $85.29 a barrel as the European debt crisis escalates and the US economy struggles to avoid a recession, reducing demand for fuel. Saudi Arabia, the Gulf’s biggest economy, relies on oil for 86% of its revenue and has a budgetary breakeven price of $91 a barrel, Barclays Capital said.The yield on Dubai’s sukuk, which doesn’t have a credit rating, jumped to 4.93% on September 5, the highest this quarter. It was at 4.89% on Monday. The rate on Abu Dhabi’s 2014 non-Islamic bond was at 1.52% on Monday, while Qatar’s 5.15 bond due the same year rose four basis points to 1.71%. Neither emirate has an international sukuk.Abu Dhabi and Qatar are rated Aa2 by Moody’s Investors Service, the third-highest investment grade. Abu Dhabi gave $20bn over the past two years to help Dubai avert defaults by state-owned companies that were exposed to a real-estate crash triggered by the global economic crisis of 2008.“Investors are currently looking for stable and low risk names, so Abu Dhabi and Qatar sovereigns as well as government related entities stand out in the regional fixed income space,” said Parth Kikani, assistant fund manager at Al Mal Capital in a telephone interview in Dubai on Thursday. “When the investors will be ready to take more risk, Dubai names will be well in demand.”The cost to insure Dubai’s debt against default jumped 67 basis points since the end of June to 407 Friday, the highest in the Middle East, according to five-year credit default swaps from data provider CMA, which is owned by CME Group Inc and compiles prices quoted by dealers in the privately negotiated market. Abu Dhabi’s credit default swaps rose seven basis points in the period to 103, while Qatar’s swaps gained five basis points to 104, the data show.The swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent, should a government or company fail to adhere to its debt agreements.Average yields on sukuk from the six-nation Gulf Co-operation Council climbed 14 basis points to 3.82% from a six-year low on August 4, the HSBC/Nasdaq Dubai GCC US Dollar Sukuk Index shows. The debt returned 1.2% this quarter, while bonds in developing markets rose 2.5%, JPMorgan Chase & Co’s EMBI Global Composite Index shows.The Bloomberg Malaysian Sukuk Ex-MYR Index, which measures foreign-currency Islamic debt sold by companies and governments in Malaysia, rose 2.2% since the end of June. The extra yield investors demand to hold Dubai’s bonds over Malaysia’s 3.928% sukuk maturing in June 2015 widened 34 basis points so far this quarter to 253 today, according to data compiled by Bloomberg.“Dubai is paying the price of its vulnerability to lower oil prices and also to the global economy through its exposure to international trade and the financial industry,” said Hussain Albanna, head of fixed-income trading at Manama-based Bahrain Islamic Bank, speaking in telephone interview on Thursday.