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Mon 21 Feb 2011 01:23 PM

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Arabian Gulf sukuk shunned by Asia on unrest

Unrest causes concern that economic growth and investment in the region will slow down

Arabian Gulf sukuk shunned by Asia on unrest
INVESTMENT CONCERNS: Asian investors are avoiding Sharia-compliant debt in the Middle East as unrest escalates across the region
Arabian Gulf sukuk shunned by Asia on unrest
A protester faces police in a Manama square on February 20, 2011

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.”

The International Monetary Fund estimated in January that economies in the Middle East and North Africa will expand 4.6 percent this year after growing 3.9 percent in 2010. The US will grow three percent and the euro-region 1.5 percent, from 2.8 percent and 1.8 percent, according to the Washington-based fund.

Investors may look to other Middle East countries that have political stability and improving economies to invest their money in sukuk.

Dubai is unlikely to see any political conflict because it’s a “rich” country and confidence in the economy has improved, said Akbar Syarief, who oversees 150 billion rupiah ($17m) of assets at Jakarta-based PT MNC Asset Management, in an interview February 18.

Dubai, the second-biggest of the seven United Arab Emirates sheikhdoms, had to seek a bailout from neighbouring Abu Dhabi after the global financial crisis pushed property prices down by more than half, and frozen credit markets forced some state-owned companies to delay loan payments. Dubai World agreed with creditors in October to restructure $24.9bn of debt. The emirate’s economy is projected to grow four percent this year, according to estimates by Standard Chartered Plc in December.

The yield on Dubai’s 6.396 sukuk maturing in November 2014 fell two basis points to 6.36 percent, according to data compiled by Bloomberg. The rate reached 6.65 percent on January 31, the highest level since December 8. The extra yield investors demand to hold Dubai’s government debt rather than Malaysia’s narrowed thirteen basis points since January 25 to 325 today, the data show.

“After the debt restructurings in Dubai and the bailout by Abu Dhabi, people are confident that Dubai’s economy is doing well,” said Syarief. “Plus, it’s a rich country, as long as the people are comfortable there probably wouldn’t be any unrest.”

Zeid at CIMB-Principal Islamic Asset, which is a joint venture between Principal Global Investors LLC and Kuala Lumpur-based CIMB Group Holdings Bhd., said he’s watching yields for an opportunity to buy sukuk in the Middle East once the crisis cools down.

GCC sales of Sharia-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 fifteen percent to $17.1bn in 2010, with offerings so far this year of $3bn.

Sharia-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.

Mohd Farid Kamarudin at Kuala Lumpur-based AmInvestment Management said he will avoid putting more money into sukuk in the Middle East, including Dubai, because of the risk the crisis will spread.

“I will not even touch Dubai for now,” said Mohd  Farid, who helps manage 1.3 billion ringgit ($428m) of Islamic assets, in an interview February 18. “If I can I will hold off buying from that region until we don’t see protesters on the streets. We’re not certain who will be next.”

Digital magazine: Read the latest edition of Arabian Business online

William Lo 9 years ago

Where were these people speaking at? Was it a conference?