06 April 2011

Dana El Batalji

Bloomberg News


DUBAI:Dubai’s borrowing costs relative to Malaysia’s sank to a record as the emirate makes progress restructuring debts.

The extra yield investors demand to own Dubai’s 6.396 percent dollar bond rather than Malaysia’s 3.928 percent sukuk dropped to 251 basis points Monday, the lowest ever, according to data compiled by Bloomberg. The gap has narrowed 66 basis points since state-owned Dubai World signed an accord with creditors to alter terms on about $25 billion of debt on March 23. Dubai also benefited from a 64 percent jump in flows to higher-yielding bonds in the first quarter, according to data from Cambridge, Massachusetts-based research firm EPFR Global.

“Investors are finding Dubai’s sukuk attractive because of the relatively higher yields, and the low risk associated with the emirate’s public debt,” Aziz Oujdi, an Abu Dhabi-based portfolio manager at Al-Hilal Bank, a Shariah-compliant lender owned by the Abu Dhabi Investment Council, said Sunday. “The Dubai World debt deal has helped restore confidence in Dubai’s ability to repay its debts.”

Investors in Malaysia are seeking opportunities in the Middle East after inflation in the Southeast Asian nation accelerated to a 22-month high of 2.9 percent in February. The yield on Dubai’s debt maturing in November 2014 fell 14 basis points to a record low of 5.24 percent yesterday, capping a decline of 54 basis points since the Dubai World accord. The rate on Malaysia’s sukuk maturing in June 2015 has climbed two basis points to 2.73 percent since the debt restructuring, Bloomberg data show.

Dubai’s economy, the second-biggest of the seven in the United Arab Emirates, may grow as much as 4 percent this year, Farouk Soussa, Citigroup Inc.’s chief Middle East economist, said March 30. Real gross domestic product grew 2.2 percent in 2010, the statistics bureau said last month.

“Selectively, we are buying Middle East sukuk,” Esther Teo, who helps oversee about $3 billion of Islamic and non-Islamic funds at Kuala Lumpur-based HwangDBS Investment Management Bhd., said Monday. “Because of the recent political crisis, some of them look interesting. We might buy Dubai sukuk.”

Middle Eastern unrest raised the cost of borrowing Shariah-compliant debt in the Persian Gulf to a five month-high of 6.05 percent on Feb. 28, HSBC/NASDAQ Dubai GCC U.S. Dollar Sukuk Index. The yield has since declined, dropping to 5.17 percent yesterday. The extra yield investors demand to hold the debt over the London interbank offered rate narrowed 52 basis points, or 0.52 percentage point, so far this year to 311, the lowest since September 2008.

Sukuk, or bonds that use asset returns to comply with Islam’s ban on interest, from the Gulf Cooperation Council, which includes the UAE and Saudi Arabia, returned 3.5 percent so far this year, the HSBC/NASDAQ Dubai GCC U.S. Dollar Sukuk Index shows. Debt in developing markets climbed for a seventh week, gaining 1.4 percent in 2011, JPMorgan Chase & Co.’s EMBI Global Diversified Index shows.

Sales of sukuk from the GCC are rising. Offerings increased to $964 million this year from $450 million in the same period last year, according to data compiled by Bloomberg.

Copyright The Daily Star 2011.