Gulf sukuk to rally on post-Mubarak sentiment

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SUKUK WATCH: GCC sales of Shariah-compliant debt, which pay asset returns to comply with Islam’s ban on interest, dropped 32 percent last year to $4.5bn

SUKUK WATCH: GCC sales of Shariah-compliant debt, which pay asset returns to comply with Islam’s ban on interest, dropped 32 percent last year to $4.5bn

Islamic bonds from the Arabian Gulf may extend last week’s rally as the resignation of Egyptian President Hosni Mubarak bolstered investor confidence that turmoil in the Arab’s world’s most populous nation will subside.

The yield on Dubai’s 6.396 percent sukuk due November 2014 declined 25 basis points last week to 6.28 percent on Feb. 11, according to data compiled by Bloomberg. The current rate is 29 basis points lower than the 6.568 percent on Jan. 31, the highest level this year. The average yields on Shariah-compliant securities in the six-nation Gulf Cooperation Council dropped 12 basis points last week, the biggest five-day drop since Jan. 14, to 5.72 percent on Feb. 11, according to the HSBC/NASDAQ Dubai GCC US Dollar Sukuk Index.

Mashreq Capital DIFC and Emirates NBD Asset Management said Mubarak’s resignation eased concern that tensions will spread throughout a region that holds more than 50 percent of the world’s proven oil reserves. Mubarak on Feb. 11 handed power to the military, bowing to demands of protesters who have occupied central Cairo for 18 days to demand an end to his 30- year rule.

“There will be a honeymoon period,” Abdul Kadir Hussain, chief executive officer at Mashreq Capital in Dubai, which oversees $200 million in bonds, said in a telephone interview yesterday. “In the short-run there will be some relief, a rally. There will continue to be a little bit of a premium on” sukuk yields in the region, he said.

The yield on Egypt’s dollar bonds due 2020 reversed gains after Mubarak’s resignation and were down 15 basis points, or 0.15 percentage point, to 6.35 percent on Feb. 11, according to Bloomberg composite prices. It reached a record 7.2 percent on Jan. 31, the data show. The cost of insuring sovereign debt fell 16 basis points to 322 at the London close on Feb. 11, according to CMA prices for credit-default swaps.

Egypt’s military vowed a transition to democracy “as soon as possible.” The Supreme Council of the Armed Forces, which has said it won’t be a replacement for a legitimate government, will keep the current cabinet in office during the transition process, a military spokesman said on state television last week.

The difference between the average yield for sukuk in developing nations and the London interbank offered rate narrowed 21 basis points, the most in nine weeks, to 289 last week, according to the HSBC/NASDAQ Dubai US Dollar Sukuk Index. The spread widened to 317 on Feb. 2, the highest level in two months.

The extra yield investors demand to hold Dubai’s government debt rather than Malaysia’s narrowed 1 basis point on Feb. 11 to 315, Bloomberg data show. It reached 384 basis points on Jan. 31, the highest since December 6, Bloomberg data show.

“Yields are higher, therefore people would be back in the market taking advantage of some of those things that have fallen before,” Mark Watts, head of fixed income at National Bank of Abu Dhabi, which manages 4.1 billion dirhams ($1.1 billion) in assets worldwide, said in a telephone interview from Abu Dhabi Feb. 13. “There are no issues with Egypt as a credit. That has largely been moved into the background.”

Islamic bonds from the Middle East remain vulnerable to similar political turmoil and rising yields on U.S. Treasuries, according to Royal Capital PJSC. Protests in Egypt began Jan. 25, inspired by an uprising that ousted Tunisian President Zine El Abidine Ben Ali on Jan. 14.

“Markets will remain volatile in light of regime changes in the Middle East,” said Ahmed Talhaoui, the Abu Dhabi-based head of investment at Royal Capital, 44 percent-owned by United Gulf Bank BSC in Manama, Bahrain. “The direction of U.S. Treasury yields is scrutinized by sukuk investors, especially after the recent spike.”

Yields on 10-year Treasuries, which serve as a benchmark on everything from sovereign bonds to corporate loans, touched 3.77 percent on Feb. 9, the highest since April 29. The extra yield investors demand to hold emerging-market debt over U.S. Treasuries widened 4.7 basis points to 257 on Feb. 11, JPMorgan Chase & Co.’s EMBI+ Index showed.

Shariah-compliant debt in the GCC returned 13.6 percent last year and 17.8 percent in 2009, the HSBC/NASDAQ Dubai GCC US Dollar Sukuk Index shows. Global sukuk gained 12.8 percent in 2010, and bonds in developing markets rose 12.2 percent, JPMorgan Chase’s EMBI Global Diversified Index shows.

The International Monetary Fund estimates growth in the Middle East and North Africa will outpace Europe and the U.S. this year. Middle East and North African economies will expand 4.6 percent after growing 3.9 percent in 2010, the IMF forecast in its report on Jan. 25. The U.S. will grow 3 percent and the euro-region 1.5 percent, according to the Washington-based fund.

Egypt’s economy may need a stimulus package to help create jobs, Finance Minister Samir Radwan said Feb. 12. The unrest may slow economic growth in the fiscal year through June to about 4 percent, though “it’s still too early to tell,” Radwan said. Authorities had forecast the economy would expand as much as 6 percent before the crisis.

GCC sales of Shariah-compliant debt, which pay asset returns to comply with Islam’s ban on interest, dropped 32 percent last year to $4.5bn, according to data compiled by Bloomberg. Global sales fell 15 percent to $17.1 billion in 2010, with offerings so far this year of $3 billion.

“Certain sukuk should benefit from a relief rally on the back of improved sentiments,” Usman Ahmed, the head of fixed- income at Emirates NBD, a unit of the United Arab Emirates’ biggest bank which oversees $300 million in bonds, said in an e- mailed response to questions yesterday. “Longer-term it will depend on how regional politics pan out to determine if the rally is sustainable.”



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