Abu Dhabi Yields Near Record Low as Investors Shun Equities: Arab Credit

Investors are shunning equity markets in the United Arab Emirates and turning to Abu Dhabi’s investment-grade bonds on concern Europe will struggle to contain its debt crisis.

The yield on Abu Dhabi government’s 5.5 percent dollar bond maturing April 2014 fell to a record 1.31 percent on Sept. 19, according to prices compiled by Bloomberg. The debt yielded 1.49 percent today. The rate is 334 basis points, or 3.34 percentage points, below the average yield on sovereign debt in the Middle East, the HSBC/NASDAQ Dubai Middle East Conventional Sovereign US Dollar Bond Index shows. Abu Dhabi’s benchmark stock index closed at the lowest level in almost seven months yesterday. It rose 0.5 percent today.

Abu Dhabi, which has the third-highest investment grade at Moody’s Investors Service, is home to about 7 percent of the world’s proven oil reserves and one of the biggest sovereign wealth funds. Crude oil prices have averaged about 20 percent more this year than in 2010, according to data compiled by Bloomberg. The emirate and the U.A.E.’s central bank supported Dubai with $20 billion during the global credit crisis.

“The underlying belief is that they would have no problem in servicing their debt and their credit is an extremely strong one,” Abdul Kadir Hussain, chief executive officer at Mashreq Capital DIFC Ltd., said in a phone interview yesterday. “Short- dated, high-quality regional paper is going to be the safe-haven trade that people will make.”

Qatar Credit Risk

The cost of insuring against a default by Abu Dhabi through credit default swaps was the second-cheapest in the Middle East and Africa at 127 basis points today, according to five-year credit default swaps from data provider CMA, which is owned by CME Group Inc. (CME) and compiles prices quoted by dealers in the privately negotiated market. That compares with 125 for Qatar, the gas-rich Persian Gulf nation, and 491 for Dubai, which isn’t rated.

The contracts pay the buyer face value in exchange for the underlying securities or the cash equivalent, should a government or company fail to adhere to its debt agreements.

The ADX General Index (ADSMI), Abu Dhabi’s benchmark stock gauge, fell to 2,531.88 yesterday, the lowest since March 3. The measure has dropped 5.9 percent this quarter compared with a decline of 4.5 percent in Dubai’s DFM General Index (DFMGI) amid concern Greece may default on its debt. About 60 million shares traded in Abu Dhabi today, compared with this year’s daily average of 69 million shares, according to data compiled by Bloomberg. Trading volumes in Dubai in 2011 are at the lowest in six years.

‘Safe Issuer’

“Our equity markets failed to convince investors as there is no liquidity, poor diversification and inability to generate high-growth business prospects,” said Ahmed Talhaoui, head of asset management at Abu Dhabi-based Royal Capital PJSC. “Our fixed-income markets are better perceived because the U.A.E. is seen as a safe issuer given its absence of deficit, its low leverage and its reliance on still strong oil prices.”

European officials are under pressure to intensify efforts to contain their 18-month debt crisis as Greece teeters on the brink of default. U.S. Treasury Secretary Timothy F. Geithner called on governments to unite with the ECB to beef-up the capacity of their 440 billion-euro ($594 billion) bailout fund, warning that failure to act threatened “cascading default, bank runs and catastrophic risk” for the global economy.

German Chancellor Angela Merkel said euro-region leaders must erect a firewall around Greece to avert a cascade of market attacks on other European states that would risk breaking up the currency area.

Richest Nation

By contrast, U.A.E. economic growth will accelerate to 3.3 percent this year from 3.2 percent in 2010, according to International Monetary Fund estimates published in its World Economic Outlook this month. Qatar, with a population of about 1.7 million, surpassed Luxembourg as the world’s richest nation in 2010 with a gross domestic product per capita of $88,221, latest estimates from the IMF show.

The yield on Qatar’s 4 percent bond maturing January 2015 fell two basis points to 2.34 percent today, according to prices compiled by Bloomberg. The rate has fallen 28 basis points so far this quarter, while the rate on Abu Dhabi’s bond has declined 32 basis points in the period. Like Abu Dhabi, Qatar is rated Aa2 at Moody’s. Both were spared the unrest that swept the Middle East this year.

“In a risk-off mode, you’ll see a flight to quality as investors tend to get out of higher beta names and into safer names,” Usman Ahmed, the head of fixed income at Emirates NBD Asset Management, a unit of the U.A.E.’s biggest bank, said yesterday.

To contact the reporter on this story: Dana El Baltaji in Dubai at delbaltaji@bloomberg.net; Zahra Hankir in Dubai at zhankir@bloomberg.net

To contact the editor responsible for this story: Claudia Maedler at cmaedler@bloomberg.net

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