The cost of insuring five-year Dubai debt against default plunged to its pre-crisis levels this morning with the emirate’s economic engine roaring back to life in the first quarter of the year.
Dubai’s five-year credit default swaps (CDS) have continued to recover on positive economic and financial investment sentiment, and have dropped to about 380 basis points this morning according to CMA DataVision’s Sovereign Risk Monitor.
The CDS are now hovering around the same levels where they were in November 2009, before the Dubai government announced a standstill on debt held by Dubai World.
The CDS peaked last year at 655bp in February, and have dropped more than 40 per cent since then. Earlier this year, CDS of debt issuers in the Gulf Cooperation Council (GCC) took a hit as political tensions in some countries of the MENA region escalated.
The cost of insuring five-year Saudi debt against default – until then one of the world’s safest 10 debt issuing sovereigns – rocketed more than 46 per cent in a single day on January 28 on regional woes. Qatar too saw its CDS rates shoot up by close to 15 per cent the same day, while Dubai CDS inched up to 452.75bp on Friday, a leap from around 400bp in the weeks before the region flared up, with problems in Tunisia, Algeria and Yemen all adding up to political tensions in an already disturbed region.
However, the perception of default and with it the CDS have been on a steady decline since Dubai World announced an agreement with 100 per cent of its creditors last month.
CDS are benchmarks for protecting debt against default and traders use them to speculate on credit quality. An increase suggests deteriorating perceptions of creditworthiness and a drop shows improvement.
The swap contracts pay the buyer face value in exchange for the underlying securities if a borrower fails to meet its debt agreements. A basis point is 0.01 percentage point.
Despite the recent steady decline in the Dubai CDS rate, analysts believe that the rate remains high in comparison with some of the other global sovereigns.
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