The unexpected winner: how the Gulf countries are really profiting from the Ukraine crisis

Published April 28th, 2014 - 02:33 GMT

A handful of oil-rich monarchies in the Gulf have become the unexpected beneficiaries of the crisis in Ukraine, attracting a helping of the global money frozen out of Russia’s debt markets.

Two bond sales planned for this week told the tale of changing fortunes within emerging markets.

Russia, which remains mired in a geopolitical dispute, was forced to cancel an issue of government debt when investors demanded a borrowing rate that the country deemed too high.

Dubai, meanwhile, was being congratulated for its $750m (Dh2.7 billion) sale of sovereign debt, the emirate’s first for 18 months.

As the fallout from unrest in Ukraine ripples out across capital markets, bankers say some investors are viewing the Middle East as a relative haven.

“There is a flight to higher quality within emerging market bonds,” says Christoph Paul, head of debt capital markets in the Middle East at Morgan Stanley.

“A lot of emerging markets have suffered political or social tensions.”

In a recent research note HSBC suggested that, as mainstream emerging markets fail to maintain their previous economic growth rates, liquidity is likely to be squeezed into smaller markets with strong macroeconomic stories, such as Qatar, Oman and the United Arab Emirates.

The shift in sentiment has come at an opportune moment. Across the region investment in large-scale construction projects is ramping up ahead of Qatar’s 2022 hosting of the World Cup and Dubai’s 2020 World Expo.

Dubai’s sale of 15-year Islamic bonds was more than three times subscribed by investors from the UK, Europe, Asia and the Middle East and eventually priced to yield 5 per cent.

The bonds, called sukuk, pay a return based on profit from a tangible asset instead of interest, which is prohibited under Islamic law.

Just four years ago Dubai was swamped by a property crash that knocked nearly 60 per cent off prices and hit global investors, as well as David Beckham, Michael Owen and other members of the England football team who had purchased houses on the man-made Palm Jumeirah island.

Eventually Dubai was given a $10bn bailout from its oil-rich neighbour Abu Dhabi.

That debt was recently rolled over at preferential rates for the next five years and Dubai is experiencing healthy property and tourism trades. Last year, the emirate’s economy grew at its fastest rate since the global financial crisis.

Gulf states are one of the stand out stories in emerging markets right now, according to one global strategist at an international bank.

Oil prices are up, economies are growing, stock markets are performing well and next month Qatar and the United Arab Emirates will graduate from frontier to emerging status in MSCI’s equity market index.

Optimism about growing Gulf economies led some analysts to predict that total corporate and sovereign bond issuance in 2014 could hit the record $50bn level seen in 2012.

So far this has not been the case. Total debt sales in the Gulf, which make up the majority of bond issuance in the Middle East, are at $11.3bn this year, compared to $16.3bn in the same period in 2013, according to data from Dealogic.

However the rest of the year could tell a different story. Activity has started to pick up as businesses and governments take advantage of favourable market conditions to issue debt.

In addition to this week’s sovereign bond issue from Dubai, Saudi Electricity, which is wholly owned by the government, recently raised $2.5bn, the largest deal in the region this year.

Companies across the region are assessing international investor appetite for future bond issues. Taqa, Abu Dhabi’s national energy group, has already started a “roadshow” for a dollar-denominated bond, its first issue since late 2012.

“In the first quarter of this year, debt issuance in the Middle East has been lower than in previous years,” says Mr Paul at Morgan Stanley.

“But issuance has picked up again this month and I think part of the reason for that is there is relatively little supply from other markets in the CEEMA region [central and eastern Europe, Middle East and Africa] so it is an opportune moment.”

As local, cash-rich investors jostle with international buyers, appetite for bonds in the Gulf is expanding, which is expected to entice more first-time issuers to launch in the markets later this year.

However debt capital markets in the Middle East remain relatively small.

“There are really only a handful of bond issuers in the Gulf,” says Claudia Calich, emerging market bond fund manager at M&G.

“They may benefit from the turmoil in Russia and Ukraine but they certainly cannot absorb all the investor outflow.”

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