Concerns for Dubai as borrowing costs rise

The substantial rise Dubai's borrowing costs is now raising concerns about increased borrowing costs for the emirate next year

Dubai's bond market sell-off stabilised yesterday, but the substantial rise in borrowing costs is now raising concerns about increased borrowing costs for the emirate next year as it faces a number of bond repayments.

Yields on government credit in Abu Dhabi also jumped sharply as investors dumped fixed income across the globe, raising borrowing costs for companies seeking to issue debt.

Comments from the Federal Reserve last week that it would moderate the stimulus being pumped into the United States economy caused yields on UAE credit to spike to their highest in 18 months on Monday amidst a wider sell-off of emerging market debt. Bond and sukuk yields move in the opposite direction from price.

"For much of 2013 the market was in a 'hunt for yield phase' and Mena credit players have been overweight [on] Dubai names so as to pick up yield," said Ollivier Courcier, the global head of fixed income at Société Générale Private Banking in Dubai. "However, now the same investors are all heading to the exit at the same time."

Yields on Abu Dhabi government 10-year bonds, maturing in 2019, gained 32 basis points yesterday to 2.558 per cent in midday trading, representing the biggest sell-off for the emirate's credit during this month's bond market rout.

The volatility may not be deterring companies seeking to raise debt.

Abu Dhabi's Shuweihat 2 (S2) power plant mandated six banks for a potential bond issue, Reuters reported yesterday.

Yields on Dubai's 10-year sukuk, sold to investors in January for a lower borrowing cost than that paid by the Italian government, have spiked 103.9 basis points since the Fed chairman Ben Bernanke's speech last month.

The notes stabilised yesterday with a yield of 4.948 per cent.

Dubai's 10-year bonds maturing in 2021 rose 9 basis points to 4.829 per cent yesterday, a day after their worst day of trading for 18 months.

The rise in yields weakens the emirate's fiscal position as it increases the cost of future borrowing, Mr Courcier added.

"Although Dubai has done a good job in managing its debt situation post-2009, the emirate still faces over US$30 billion of debt maturities next year, and this is also at the forefront of investors' minds during periods of general market weakness," he said.

SocGen's analysts say high-grade debt from the Middle East, including Abu Dhabi and Qatar, was currently unappealing because of the modest credit spread over the US treasury curve.

"There has not been much differentiation between bond markets during the recent US-led sell-off," Capital Economics wrote in a research note.

"The yields of government bonds that are close substitutes for each other are more likely to move closely together, especially where currency risks between markets are perceived to be relatively low."