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Tue 1 Feb 2011 01:26 PM

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Gulf sukuk sink as Egypt turmoil cuts demand

Islamic bonds are tumbling, sending Arabian Gulf yields to a six-week high

Gulf sukuk sink as Egypt turmoil cuts demand
RATINGS DOWNGRADE Moody’s cut Egypt’s rating to Ba2 from Ba1 and changed the outlook to negative from stable because of the escalating political tensions (Getty Images)

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.

Inflation is accelerating in seven of the ten biggest developing nations after surging prices for food, cotton and oil pushed the Standard & Poor’s GSCI Index of commodities to the highest level since September 2008. Crude oil advanced 4.3 percent in New York trading on January 28, the most since September 2009. Oil for March delivery rose 3.2 percent yesterday.

The GCC includes the United Arab Emirates and Saudi Arabia, the world’s biggest crude exporter.

Global sales of sukuk, which pay asset returns to comply with Islam’s ban on interest, fell fifteen percent to $17.1bn in 2010, with offerings so far this year of $1.1bn, according to data compiled by Bloomberg. Issuance from the GCC dropped 32 percent last year to $4.5bn.

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.

The yield on Dubai’s 6.396 percent sukuk maturing in November 2014 rose 14 basis points to 6.65 percent yesterday, the highest level since December 8, according to data compiled by Bloomberg. The extra yield investors demand to hold Dubai’s government debt rather than Malaysia’s widened 16 basis points yesterday to 383, a two-month high, the data show.

“The risk of contagion of the situation in Egypt directly impacts GCC sukuk spreads because of the Gulf’s proximity to Egypt,” Ahmad Alanani, the Dubai-based head of Middle East fixed-income sales at investment bank Exotix Ltd, said in an interview yesterday.

Moody’s cut Egypt’s rating to Ba2 from Ba1 and changed the outlook to negative from stable because of the escalating political tensions, it said in a statement yesterday. Egypt’s stock market was closed after the benchmark EGX30 Index slid sixteen percent last week.

The yield on Egypt’s 5.75 percent non-Islamic bonds due April 2020 climbed 48 basis points to a record 7.07 percent yesterday, according to data compiled by Bloomberg.

Egypt cancelled plans to raise EGP4bn ($683m) from the debt market this week, Mohamed Barakat, chairman of state-run Banque Misr, who is also the head of the country’s banking association, said January 30.

“The current crisis in Egypt is increasing the geo-political risk for the world,” Scott Lim, who oversees the equivalent of $670m of assets as chief executive at Kuala Lumpur-based MIDF Amanah Asset Management Bhd, said in an interview yesterday. “People are worried oil prices will shoot up and it could affect the world economy.”