Gulf sukuk sink as Egypt turmoil cuts demand

Islamic bonds are tumbling, sending Arabian Gulf yields to a six-week high, as concern political unrest in Egypt will spread pushes up the cost of crude and threatens the global economic recovery.

Average yields on Sharia-compliant sukuk from the six-nation Gulf Cooperation Council jumped 28 basis points since January 27 to 5.59 percent yesterday, according to the HSBC/NASDAQ Dubai GCC US Dollar Sukuk Index. The extra yield investors demand to hold emerging-market debt over US Treasuries widened 24 basis points over the past two days to 270, the highest level since November 30, JPMorgan Chase & Co’s EMBI+ Index showed.

“Investors are jittery and are waiting to see how quickly the crisis in Egypt is resolved,” Muhammad Asad, who oversees $210m of Sharia-compliant funds as chief investment officer at Al Meezan Investment Management Ltd, Pakistan’s biggest Islamic fund, said in an interview yesterday. “It cannot be allowed to linger on or it may have long-term effects on the Islamic market in the Middle East.”

The Middle East, where Islam is the dominant religion, accounts for 57 percent of the world’s proven oil reserves, according to data compiled by Bloomberg. Moody’s Investors Service cut Egypt’s credit rating yesterday to two levels below investment grade. The nation plans to issue guidelines this year to pave the way for the country’s first sale of Islamic bonds.

Money-market rates in developing markets are increasing at the fastest pace since 2008 as China to Brazil lift borrowing costs and banks hoard cash on concern protests in Egypt may destabilise the Middle East. The opposition movement, backed by former United Nations nuclear official Mohamed ElBaradei and the Muslim Brotherhood, is aiming to force the resignation of the 82-year-old president, Hosni Mubarak, and end his 30-year rule, said Mahmoud El-Said, one of the organisers.

Mubarak ordered his government to start talks with the opposition, vice president Omar Suleiman said on state television late yesterday.

The difference between the average yield for Arabian Gulf sukuk and the London interbank offered rate widened 31 basis points, or 0.31 percentage point, since January 27 to 368 yesterday, according to the HSBC/NASDAQ Dubai GCC US Dollar Sukuk Index. The spread reached 331 on January 18, the least since September 12, 2008.

“Market participants fear that the contagion might spread to the rest of the region which could result in an oil-price spike, thereby aggravating global inflation and adversely impacting global growth,” Rohit Chawdhry, who helps manage $350m of assets at Bahrain Islamic Bank BSC, the Persian Gulf country’s second-largest Islamic lender, said in an e-mail yesterday.