Dubai bonds posting best rally in Mideast as Bahrain trails

Dubai, which has $16bn of publicly held debt maturing later
this year, is posting the region’s best returns as investors turn to the
tourism and trade hub to avert political turmoil sweeping the Arab world.

Dubai’s dollar bonds due 2020 have returned 14.93 percent
this year, more than four times the regional average as measured by the HSBC
Middle East sovereign bond index. Bahrain is the worst performer among the
region’s dollar bonds with maturities of 10 years as a Saudi Arabian-led force
that ended protests three months ago has yet to restore investor confidence.

Amid uprisings that ousted long-time leaders in Tunisia and
Egypt and threaten others in Libya, Yemen and Syria, Dubai on June 15 sold $500m
in 10-year bonds at the lowest interest rate since it required a $20 billion
bailout from neighbouring Abu Dhabi in 2009 to pull it out of debt crisis.
Dubai is the second largest of seven sheikhdoms that make up the United Arab
Emirates.

Dubai looks good “relative to others where there are
concerns that are only growing,” Ann Wyman, London-based head of emerging
markets research at Nomura Holding Inc, said in a telephone interview. “There’s
an improving outlook for Dubai versus its peers and versus its own past.”


Yields on Dubai’s dollar bonds due 2020 have dropped to
6.937 percent midway through the year from 8.564 percent at the end of 2010.

Dubai sought financial help from Abu Dhabi, the capital of
the UAE, after shrinking credit dragged property prices down by more than half
from their 2008 peak. Abu Dhabi debt was the second-best performer, with total
returns of 5.21 percent as of 6:30 p.m. Dubai time on Tuesday. Yields on Abu
Dhabi’s April 2019 debt fell to 4.283 percent from 4.549 percent at the end of
2010.

The average return on bonds in the region was 4.44 percent,
according to the HSBC/NASDAQ Dubai GCC Conventional US Dollar Bond Index.

“Credit conditions improved considerably from March onwards,
and Dubai bonds were the biggest beneficiary,” said Nick Stadtmiller,
fixed-income analyst at Emirates NBD PJSC. “Abu Dhabi and Qatar bonds were
trading at much tighter levels, so yields have not had the space to come down
as far as yields on Dubai bonds have.”

Qatar’s debt maturing January 2020 returned 3.14 percent,
the third best. Qatar holds the world’s third-largest gas reserves.

The biggest loser in the region in the first half was
Bahrain, the majority Shiite Muslim island state ruled by King Hamad Bin Isa Al
Khalifa, a Sunni. The Al Khalifa family invited a Saudi-led force to help
restore order in March.

The protests in February and March left 20 people dead, hurt
tourism and spurred the central bank to cut its forecasts for economic growth
this year by two percentage points to 3 percent. Standard Poor’s and
Moody’s Investors Service reduced Bahrain’s credit ratings.

Investors in Bahrain lost 1.65 percent in the first half of
the year. Yields on Bahrain debt maturing March 2020 rose to 5.875 percent from
5.248 percent at the end of 2010.

Investor confidence in Egypt decreased over the period,
making the Arab world’s most-populous state the second-worst performer, with a
loss of 0.9 percent. The decline came even as US President Barack Obama offered
a guarantee on $1 billion of external borrowing and the International Monetary
Fund announced on June 5 that it agreed to a $3 billion loan for Egypt. The 12-
month loan was part of a broader international package for the country after
the uprising that resulted in the ouster of President Hosni Mubarak hurt
revenue from tourism and industry.

Egypt doesn’t need to borrow from the IMF and World Bank “at
the moment” after it cut its budget-deficit goal for the fiscal year starting
July 1, Finance Minister Samir Radwan said June 25.

 “Egypt has probably
priced in most of the good news,” said Nomura’s Wyman. “Fiscal data is probably
going to look worse, not better.”

To be sure, concerns about Dubai’s ability to service its
debt haven’t dissipated. Dubai this month stopped supplying gasoline to its
neighbors as subsidies on fuel prices squeeze its ability to service and repay
debt.

Emirates National Oil Co, a Dubai government-owned refiner
and operator of service stations, closed filling points in Sharjah and
restricted supplies to other northern emirates last week.

Dubai borrowed at least $129bn to turn itself into a
tourism, trade and financial services hub, according to Credit Suisse Group AG.

“Should oil prices weaken substantially – though this is not
our base case view – concerns may rise about how much money from Abu Dhabi
could be made available to support Dubai,” Wyman said.

Abu Dhabi controls “95 percent of the country’s hydrocarbon
reserves and therefore enjoys abundant fiscal space relative to other
emirates,” according to an IMF paper by Serhan Cevik published this month.
“Though the sustainability of public debt is not an immediate issue for the UAE
as a whole, there are considerable differences at the sub-national level.”