x Abu Dhabi, UAEFriday 28 July 2017

With room to breathe, investors ready for Dubai plunge

Q&A: The cost of insuring Dubai's debts against default falls to the lowest level since the crisis at Dubai World three years ago.

Why is market confidence improving in Dubai?

Investors often have short memories. But the result of successful bond payments and refinancings at its government-related holding companies has eased market concerns significantly. DIFC Investments, Jebel Ali Free Zone Authority and Dubai Holding Commercial Operations Group have all repaid debts coming due to bondholders this year, despite market fears that they could face difficult refinancings. That has bought breathing room for Dubai's markets until at least next year - convincing many companies now is the time to sell bonds to investors.

What are investors buying?

Credit is in high demand as perceptions of risk around Dubai recede. The cost of insuring Dubai's sovereign debts against default has fallen to the lowest levels since Dubai World requested a standstill on its debt repayments in November 2009.

Credit default swaps, which reflect the market's view of an issuer's likelihood of default, have fallen 112 basis points to 331.153 basis points so far this year.

That has also pushed the yields on the emirate's 10-year bonds, which pay a coupon of 5.591 per cent, to a record low of 4.8577 per cent. Bond yields move in the opposite direction to price.

But borrowers selling sukuk are the star performers - this is already the best year on record for the regional Islamic bond market.

Who is investing in Arabian Gulf debt?

Cash-rich Islamic investors have been seeking highly rated assets in which to invest; these are scarce worldwide as a result of economic turmoil in the United States, Asia and the euro zone. Assets that are also Sharia-compliant are even harder to find.

Islamic bonds linked to resource-rich Gulf states are receiving huge levels of interest since they are perceived as havens: for instance, a US$4 billion (Dh14.69bn) sukuk sold by Qatar's government this month received $24bn of orders.

Is the stock market also performing well?

Yes, but the picture is mixed: Dubai stocks are up 5.7 per cent this month but the latest rally is fragile because trading activity is usually low during Ramadan. Unlike sukuk and bonds traded on exchanges such as those in London and Luxembourg, the Dubai Financial Market suffers from poor liquidity and is largely ignored by institutional investors, meaning prices lack stability.

ghunter@thenational.ae

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