Arabian Gulf sukuk shunned by Asia on unrest

Asian investors said they are avoiding Sharia-compliant debt in the Middle East as unrest escalates across the region, causing concern that economic growth and investment will slow.

CIMB-Principal Islamic Asset Management, AmInvestment Management and NBP Fullerton Asset Management, who together manage $2.2bn, said they need signs of stability before investing. Average yields on Sharia-compliant debt in the six-nation Gulf Cooperation Council have climbed 59 basis points to 5.88 percent since January 25 when the uprising erupted in Egypt, the HSBC/NASDAQ Dubai GCC US Dollar Sukuk Index shows. Rates on Bahrain sukuk jumped to a nine-month high after at least five people were killed in anti-government protests.

Rising yields may scuttle plans by Yemen, Palestine and Egypt to sell their first sukuk as investor demand wanes amid the political crisis. Sovereign risk has increased and investors may switch to developed countries where economies are improving, according to Karachi-based NBP Fullerton Asset Management.

“Bahrain is extremely volatile so we watch it with caution,” Zeid Ayer, who helps manage $1.6bn of Sharia assets at Kuala Lumpur-based CIMB-Principal Islamic Asset Management, said in an interview February 18. “I buy global sukuk but recently I haven’t bought anything.”

The yield on Bahrain’s 6.247 percent five-year note climbed 67 basis points, or 0.67 percentage point, last week to 3.85 percent, the biggest increase among 20 securities tracked by the HSBC/NASDAQ Dubai GCC US Dollar Sukuk Index. The rate on the debt advanced 140 basis points since January 25, according to data compiled by Bloomberg.

The extra yield investors demand to hold Bahrain’s Islamic bonds over US Treasuries widened 74 basis points to an almost twelve-month high of 235 last week, according to Bloomberg data.

The rallies have spread from Tunisia and Egypt to Iran, Algeria, Yemen and Libya. In Libya, holder of the largest proven oil reserves in Africa, more than 200 people have been killed, Human Rights Watch said. Saif Al Islam Qaddafi, son of Libyan leader Muammar Qaddafi, said on state television that protesters must engage in dialogue or face a civil war and “rivers of blood.”

In Bahrain, the protesters are demanding democracy and the ouster of Prime Minister Sheikh Khalifa bin Salman Al Khalifa, a member of the Sunni Muslim royal family who has held the post for four decades. A member of the Saudi royal family, Prince Talal bin Abdul Aziz, said in an interview with BBC Arabic TV that unless King Abdullah allows more political participation, the nation may also see protests.

Sajjad Anwar, who helps manage the equivalent of $187m at NBP Fullerton Asset Management, a unit of the nation’s biggest lender National Bank of Pakistan, said the economy and investment may be hurt if the unrest persists.

“At the moment the uncertainty is having a spiraling-impact, and as long as the uncertainty continues to linger, investors will shy away,” Anwar said in a February 18 interview. “It’s the state of uncertainty that hurts more than the bad news.”