Dubai sales of Shariah-compliant debt are set to surge should the emirate win Expo 2020 as the sheikhdom finances the building of roads, railways and an airport expansion for the event.
The second-richest member of the United Arab Emirates is one of four cities competing for the world fair, which will be awarded today by the Bureau International des Expositions in Paris. A win would spur construction projects, higher government spending and more issuance, Hussain Al Qemzi, chief executive officer of Noor Islamic Bank, said in an interview at the Global Islamic Economy Summit in Dubai yesterday.
Dubai would spend almost 6 billion euros ($8.1 billion) on infrastructure projects ahead of the expo, Sheikh Ahmed bin Saeed Al Maktoum, head of Dubai’s Supreme Fiscal Committee and chairman of Emirates Airline, said Nov. 17. The sheikhdom set a three-year timetable to become the capital of the Islamic economy globally, and state-owned companies, including Emirates and the Dubai Electricity & Water Authority, have sold sukuk in 2013.
“The Expo would mean significant infrastructure spending,” Adnan Chilwan, CEO of Dubai Islamic Bank PJSC, said in an interview at the conference yesterday. “Raising funds would require the right financial structures and, in my mind, capital market transactions, bonds or sukuk will see a surge. The way the wind is blowing, sukuk may be the preferred route.”
Sukuk issuance is set to jump from just over $51 billion this year to about $60 billion in 2014, Moody’s Investors Service said in a report dated yesterday. The yield on Dubai’s $650 million May 2022 bond has risen 47 basis points this year to 4.79 percent at 4:26 p.m. in Dubai, according to data compiled by Bloomberg. That compares with a 96 basis-point increase in 10-year Treasuries to 2.72 percent.
The emirate’s credit-default swaps, contracts for insuring its debt against default for five years, tumbled to 217 basis points yesterday from 445 at the end of 2011.
“If you look at Dubai’s CDS compared to what they were during the crisis they have substantially come down,” Chilwan said. “A win of the Expo would give Dubai more credibility and something to look forward to” which could further lower borrowing costs, he said.
Winning the Expo could boost Dubai’s economic growth to 6.4 percent over the next three years, Barclays said in a research note yesterday.
The emirate will speed up plans for a 5 billion-dirham ($1.36 billion) expansion of the city’s metro network if it wins the bid, Dubai’s Roads & Transport Authority said in June. A new purpose-built exhibition center with themed pavilions will be constructed in the desert south of the city, according to Dubai’s bid website.
The potential increase in spending raises risks of further debt accumulation by Dubai entities, Barclays said. The emirate roiled global markets with a request to delay $25 billion of debt payments in 2009. Government-related companies including Dubai World Corp. and Nakheel PJSC were forced to re-negotiate with lenders.
Turkey’s Izmir, Russia’s Ekaterinburg, and Brazil’s Sao Paulo are also in the running to host the more than 160-year-old event. Confidence has been building in Dubai, where sukuk yields, particularly for real-estate developers, have fallen amid expectation of a win.
Emaar Properties PJSC, developer of the world’s tallest tower, saw yields on its $500 million sukuk due August 2016 tumble 88 basis points this year to 3.53 percent yesterday, according to data compiled by Bloomberg. The yield on Nakheel’s 4.27 billion-dirham sukuk due the same month slid 226 basis points, or 2.26 of a percentage point, to 7.01 percent.
“Expo is only part of the Dubai story,” Moinuddin Malim, chief executive officer of Mashreq Al Islami, said in a Nov. 25 interview at the conference in Dubai. “They have a very good master plan. Hopefully when they win the Expo, we will see that plan put through its paces.”