Spending on new projects such as hotels needed to cope with the influx of visitors to the exhibition will probably require the issuance of new higher-yielding bonds, according to analysts.
Expo 2020 success for Dubai could trigger bond market bonanza
Spending on new projects such as hotels needed to cope with the influx of visitors to the exhibition will probably require the issuance of new higher-yielding bonds, analysts said.
Bonds and sukuk of property developers such as Emaar Properties have rebounded this year amid improving economic fortunes for the UAE. Demand for real estate from investors in countries torn by violence in the region such as Egypt and Syria, as well as local demand, have boosted home values. Dubai has estimated that it would need to invest about $7 billion in infrastructure projects. Its existing debt load is more than 100 per cent of its GDP.
"I'm honestly very optimistic," the Emaar chairman Mohamed Alabbar told The National this week. "I think we have a good chance of winning the Expo. It will validate that Dubai is a worthy city of the world. It's good for the credibility of the city, tourism, travel."
The yield on Nakheel's sukuk due August 2016 fell to an all-time low of 7.15 per cent on Friday, bringing its drop this year to 212 basis points, according to data compiled by Bloomberg. The rate on Emaar's bond due the same month tumbled to 3.44 per cent, a decline of 97 basis points. That compares with a 110 basis-point increase to 4.28 per cent for average corporate sukuk in the GCC, HSBC/Nasdaq Dubai indexes show.
"Dubai's increasing prospects of winning Expo 2020 have played a role in tightening spreads across the curve," said Gus Chehayeb, Dubai-based Middle East research director at Exotix in Dubai. "It's hard to imagine how yields can tighten much more from these levels. If they do win 2020, we should expect a dramatic increase in the number of projects which will require funding from capital markets. Given Dubai's high debt load, investors will want juicier yields to fund these new developments."
Stocks too haven't been left out of the rally, with the Dubai Financial Market General Index jumping 80 per cent this year, while the Abu Dhabi Securities Exchange rose 48 per cent.
Perceptions of risk are decreasing amid evidence of economic recovery such as the completion of projects, said Sachin Mohindra, an Abu Dhabi-based portfolio manager at Invest AD's GCC Focus Fund. Construction and logistic companies have benefited the most from the recent hopes that Dubai will clinch the World Expo, he said.
"A lot of the recent growth in the UAE has been unrelated to the chance of Dubai getting Expo 2020 but if it did, it would be the icing on the cake," said Simon Kitchen, a Cairo-based Middle East and North Africa strategist at Egyptian investment bank the EFG-Hermes Holding. "Stock and bond prices have been rallying, so we may see a bit of a selloff whatever the income after a good year."