Emerging market debt sales plunge

Global investors ditched bonds last month after comments by the Federal Reserve chairman Ben Bernanke on easing monthly bond purchases under its quantitative easing strategy. Yasuyoshi Chiba / AFP

Emerging market debt sales shrank to a five-year low last month as protests engulfed developing economies including Brazil, Egypt and Turkey and the US Federal Reserve signalled tighter monetary policy to come.

The seizure on credit markets resulted in emerging market bond sales falling to just $4.8 billion during the month, a decrease of 92 per cent from a month earlier.

"Increased borrowing costs, rapidly dwindling market liquidity, and a knock-on effect from increasing yields elsewhere such as the US has sapped demand for EM paper," Thomson Reuters said in its report.

Credit markets convulsed after comments by the Federal Reserve chairman Ben Bernanke in May and June about the central bank's timetable for slowing its monthly $85bn of bond purchases under its quantitative easing strategy.

Global investors ditched bonds during June. Fixed income exchange-traded products reported monthly outflows for the first time since December 2010, according to data from BlackRock, the world's biggest asset manager.

The Middle East has not been immune.

Bahrain's government prepared for a bond launch last month but is yet to tap debt markets. In May, MAF Holding shelved a sale of perpetual bonds, which carry no fixed maturity date.

Some companies continue to seek bond sales undeterred.

Islamic Development Bank, the Jeddah-based financial institution which is one of the few Sharia-compliant companies to carry the highest AAA credit rating, sold $1bn worth of sukuk in May.

Ahli United Bank, a Bahrain-based lender, is in talks with banks to launch perpetual bonds to boost Tier 1 capital, following sales of similar debt by Abu Dhabi Islamic Bank and Dubai Islamic Bank, Bloomberg News reported yesterday.

Fixed income investments have performed poorly, with funds tracking the HSBC/Nasdaq Dubai GCC conventional US dollar bond index now losing money on a year-to-date basis.

Total returns are down 3.46 per cent so far this year.

"Middle East credit markets are likely to remain in defensive mode in the coming weeks as investors digest the rapid sell-off in emerging market debt sparked by fears that the United States Federal Reserve will start to gradually withdraw its quantitative easing programme," analysts from InvestAD wrote in a research note.

"Middle East markets have dropped in thin trading in recent weeks, because of a combination of local investors sitting out, and dealers being unwilling to add inventory in their books while US Treasuries remained volatile."

The IMF joined banks, including Goldman Sachs, this week in warning that the deceleration of the Federal Reserve's quantitative easing policy may hamstring emerging market growth.

The IMF downgraded its forecasts of economic growth for the year ahead, shaving off 0.3 percentage points of economic growth for emerging market economies to an average of 5.0 per cent this year and 5.4 per cent next year.

The fund warned that growth could falter if the unwinding of US monetary policy stimulus leads to sustained capital flow reversals.