Dubai Haven Status Frays as CDS Follow Iraq Higher: Arab Credit

Dubai is losing the trust of debt investors faster than any nation in the Middle East except Iraq as regional turmoil threatens its haven status.

The cost of insuring the emirate’s bonds against non-repayment using credit-default swaps climbed to 166 basis points on July 21, the highest level since May 5, according to prices compiled by CMA. Swaps gained 31 basis points since June 9, compared with an increase of 96 basis points for Iraq, where militants from Islamic State, an al-Qaeda offshoot formerly known as ISIL, have taken control of parts of the country.

The turmoil in Iraq, violence in the Gaza strip and conflict in Syria are shaking investor confidence in the Middle East just as Dubai revives a construction and spending spree to cement its role as the region’s business and tourism hub. Swaps are gaining after last month falling to the lowest level since before Lehman Brothers Holdings Inc’s collapse.

“Dubai CDS has risen the most as it’s a proxy for the Gulf Cooperation Council region,” Ali Marshad, a fixed-income portfolio manager at Securities and Investment Co. in Manama, Bahrain, said in e-mailed comments. “The risk-off mode in the markets over the past month or so adds to that effect.”

Dubai’s Recovery

The regional conflict may test Dubai’s recovery about five years after its rescue from near default with a $20 billion cash injection from Abu Dhabi. Lacking the oil and gas of its larger neighbor, Dubai racked up $129 billion of debt transforming itself into a tourism hub and the Middle East base for banks such as HSBC Holdings Plc and Deutsche Bank AG

The stock market more than doubled last year, property prices are surging and companies including real-estate developer Nakheel PJSC are repaying debt early as they seek to regain investor confidence.

The yield on Middle East bonds rose 4 basis points between June 9 and July 21, according to JP Morgan Chase & Co. data. That follows a 20 basis-point drop since the start of the year. The Dubai Financial Market General Index dropped 1 percent to 4,678.72 today and has risen 39 percent since the start of the year.

The escalating political risk and the rising cost of debt insurance may deter bond issuers from accessing the market after a flurry of sales, Apostolos Bantis, a Dubai-based credit analyst at Commerzbank AG, said yesterday by e-mail. Companies such as Investment Corporation of Dubai, DP World Ltd and Majid Al Futtaim have raised billions of dollars from bonds this year.

CDS Rise

The rise in CDS may prove temporary given the emirate’s economic growth and as fears of a wider regional conflict recede. Dubai’s gross domestic product will probably accelerate 4.7 percent this year, Mohamed Lahouel, chief economist for the Dubai Department of Economic Development, said in March, and the stock market is up 40 percent in 2014.

“The CDS levels will gradually start to drop again as economic conditions continue to be positive,” SICO’s Marshad said.

Rising CDSs are more closely related to international bond investors’ desire to protect themselves against any spillover from Iraqi and Syrian turmoil, rather than a reflection of Dubai’s economy, according to Samer Mardini, the Dubai-based vice president of fixed income at SJS Markets.

“The crisis in Syria and Iraq and the spread of ISIL in neighboring countries is affecting sentiment towards the whole Middle East,” Mardini said July 20 in a phone interview. “Dubai feels that the most.”

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