SUKUK MAR­KET GROW­ING STRONGER

AF­TER THREE CON­SEC­U­TIVE YEARS OF DE­CLINE, THE GLOBAL SUKUK MAR­KET HAS STARTED LOOK­ING UP WITH THE IS­SUANCES TOUCH­ING $74.8 BIL­LION (QR272.27 BIL­LION) IN 2016, REG­IS­TER­ING AN IM­PRES­SIVE GROWTH OF 13.2% COM­PARED WITH THE PRE­VI­OUS YEAR.

Qatar Today - - INSIDE THIS ISSUE - BY VL SRINIVASAN

Af­ter three suc­ces­sive years of de­cline, the global sukuk mar­ket has started look­ing up with the is­suances touch­ing $74.8 bil­lion (QR272.27 bil­lion) in 2016, reg­is­ter­ing an im­pres­sive growth of 13.2% com­pared to the pre­vi­ous year.

Ofthis, cor­po­rate is­suers dom­i­nated the mar­ket with $47.3 bil­lion (QR170.28 bil­lion) of is­suance vol­ume, a share of 63.2%, and these were mainly from the fi­nan­cial ser­vices sec­tor, which ac­counted for 80.7% of to­tal cor­po­rate is­suances.

The big­gest cor­po­rate sukuk is­suances were $1.5 bil­lion (QR5.46 bil­lion) from IDB Trust of the Is­lamic Devel­op­ment Bank, $1.2 bil­lion (QR4.36 bil­lion) from Dubai's DP World, $1 bil­lion (QR3.64 bil­lion) from Emi­rates Is­lamic Bank, $500 mil­lion (QR1.82 bil­lion) from Qatar's Ez­dan Hold­ing Group, and from sev­eral fi­nan­cial in­sti­tu­tions in Malaysia.

In fact, Malaysia con­tin­ued to be the main driver for sukuk is­suance for the year with a mar­ket share of 46.4% of to­tal is­suances, fol­lowed by In­done­sia and the UAE which ac­counted for 9.9% and 9% of the mar­ket share, re­spec­tively. Turkey too is­sued a record sukuk of $4.1 bil­lion (QR14.92 bil­lion) in 2016 and even coun­tries such as Sene­gal, Jor­dan, Ivory Coast and Kuwait also raised money through sukuk is­suances.

De­spite the ad­verse eco­nomic con­di­tions around the world, the global sukuk mar­ket has been grow­ing as the de­mand for sharia-com­pli­ant as­sets con­tin­ues to out­pace sup­ply, al­beit at a slower rate, as high­lighted by the Kuala Lumpur-based Is­lamic Fi­nan­cial Ser­vices Board (IFSB).

The in­clu­sion of sukuk in the global bond in­dex in 2016 has also im­proved the pool of de­mand and the Sov­er­eigns' need to plug the deficit gap from lower oil rev­enue led to big­ger fund­ing re­quire­ments in­clud­ing sukuk, and the dom­i­nance of Sov­er­eign sukuk in H1 2017 is ex­pected to con­tinue for the re­main­ing part of the year – from Oman, Bahrain and Kuwait.

Sukuk has been in­cluded in the Emerg­ing Markets Bond In­dex (EMBI) and JP Mor­gan Asia Credit In­dex (JACI) indices pub­lished by in­vest­ment banker JP Mor­gan later this year. This is viewed as a pos­i­tive devel­op­ment as more global debt in­vestors from around the world will fo­cus their at­ten­tion on the dif­fer­ent kinds of sukuk, and it would in­crease the liq­uid­ity of sukuk in­stru­ments.

Though the US Fed­eral Re­serve has raised the rate twice this year (three times since De­cem­ber 2016), with an­other hike likely by the year-end and plans to re­duce its hold­ings in Trea­suries – it is ex­pected to hy­po­thet­i­cally drive yields. None­the­less, cor­po­rate is­suers may stay on the side­lines or look for al­ter­na­tive fund­ing av­enues, in­clud­ing local cur­rency sukuk, loans or eq­ui­ties.

Sig­nif­i­cant growth in GCC

In the GCC re­gion, the to­tal is­suances stood at $19.6 bil­lion (QR71.34 bil­lion) dur­ing the year, com­pared with $18 bil­lion (QR65.52 bil­lion) the pre­vi­ous year, due to higher is­suances from Sov­er­eigns, in­di­cat­ing that sukuk re­mained a ma­jor source to meet the bud­getary deficits of the re­gion's gov­ern­ments in a sce­nario of low oil prices and a fall in ex­port earn­ings.

This was pri­mar­ily due to the jumbo local and for­eign cur­rency is­suances by some GCC gov­ern­ments, in­clud­ing the $9 bil­lion (QR32.76 bil­lion) sukuk is­sued by Saudi Ara­bia in April, which is said to be one of the largest sukuk is­sued glob­ally so far.

Ex­plain­ing the rea­sons be­hind the growth, Hani Ibrahim, Man­ag­ing Di­rec­tor and Head of Debt Cap­i­tal Markets at QIn­vest, says while the Mid­dle East faced ad­verse eco­nomic con­di­tions due to the de­cline in oil prices over the last two years, the oil price and the fi­nan­cial markets started to sta­bilise in the re­cent past.

Though the liq­uid­ity po­si­tions of re­gional banks which are the main in­vestors in sukuk de­clined due to the eco­nomic con­di­tions, they are keep­ing more of their liq­uid­ity in cash and liq­uid in­stru­ments due to tighter un­der­writ­ing stan­dards and slower growth in the loan mar­ket. For Is­lamic banks in par­tic­u­lar this has meant that the amount of liq­uid­ity available to them to go into sukuk has re­mained strong.

“In ad­di­tion, many of the re­gional Sov­er­eigns con­tinue to post deficits which are partly funded through the is­suance of bonds and sukuk, both local and in­ter­na­tional. Many of the sukuk is­sued in 2017 have been large Sov­er­eign trans­ac­tions to ad­dress this fund­ing gap. Com­bin­ing this with the fact that glob­ally there con­tin­ues to be a strong de­mand for emerg­ing mar­ket credit as­sets, a 37% in­crease in sukuk is­suance be­tween H1 2016 and H1 2017 has been recorded,” says Ibrahim.

A good year

In a re­port, global rat­ings agency Stan­dard & Poor's says while this growth au­gurs a good year for sukuk, it rep­re­sents

“THE CUR­RENTLY DIF­FI­CULT OP­ER­AT­ING EN­VI­RON­MENT OF­FERS FEW OP­POR­TU­NI­TIES FOR LEND­ING GROWTH, AND SOME BANKS MIGHT IN­VEST A POR­TION OF THEIR LIQ­UID­ITY IN AS­SETS THAT GEN­ER­ATE HIGHER IN­COME THAN CASH AND MONEY MAR­KET IN­STRU­MENTS. IN THIS CON­TEXT, BONDS AND SUKUK AP­PEAR MORE AT­TRAC­TIVE THAN IN­TER­BANK OR CEN­TRAL BANK DE­POSITS, DRIV­ING FUR­THER IN­TER­EST IN THE SUKUK MAR­KET.” DR MO­HAMED DAMAK Se­nior Di­rec­tor, Global Head of Is­lamic Fi­nance S&P Global Rat­ings

an ex­cep­tion rather than a new norm as some of the large is­suances of 2017 are un­likely to be re­peated in 2018.

The to­tal global sukuk is­suance is also ex­pected to be around $75 bil­lion - $80 bil­lion (QR273 bil­lion- QR291.2 bil­lion) in 2017, up from pre­vi­ous ex­pec­ta­tions of $60 bil­lion-$65 bil­lion (QR218.4 bil­lion- QR236.6 bil­lion).

On the up­ward re­vi­sion in its forecast, the rat­ings agency says there were two main rea­sons. While the gov­ern­ments were not un­der pres­sure to raise funds quickly and wanted to di­ver­sify their in­vestor base, the other rea­son has been the re­gional and global liq­uid­ity which re­mained good.

The GCC gov­ern­ments, which were fac­ing a liq­uid­ity cri­sis fol­low­ing a slump in oil prices for more than two years, heaved a sigh of re­lief as OPEC an­nounced a cut in oil pro­duc­tion by about 1.2 mil­lion bar­rels a day, which came into ef­fect from Jan­uary this year, and this helped in sta­bi­liz­ing the prices.

Even cer­tain poli­cies ini­ti­ated by the GCC gov­ern­ments, such as cut­ting down un­nec­es­sary ex­pen­di­ture, and is­suance of large bonds also helped in eas­ing liq­uid­ity pres­sure. These gov­ern­ments have not only raised money from the con­ven­tional sources but also turned to the sukuk mar­ket to di­ver­sify their in­vestor base to meet the de­mand for project fund­ing.

The agency, how­ever, still fore­sees sig­nif­i­cant fi­nanc­ing needs for GCC gov­ern­ments, par­tic­u­larly the UAE and Qatar, which are host­ing the World Expo in 2020 and the FIFA World Cup in 2022, re­spec­tively, and es­ti­mate the same to be around $275 bil­lion (QR1 tril­lion) be­tween 2017 and 2019 to com­plete the var­i­ous mega in­fras­truc­ture projects.

“We think that around 50% will be debt-fi­nanced, through a com­bi­na­tion of bonds and sukuk. Gov­ern­ments are likely to con­tinue to pre­fer bonds over sukuk,” the agency adds.

Dr Mo­hamed Damak, Se­nior Di­rec­tor, Global Head of Is­lamic Fi­nance, S&P Global Rat­ings, says the strong per­for­mance also stemmed from the good liq­uid­ity con­di­tions in the GCC and in global fi­nan­cial markets gen­er­ally.

The GCC in­vestors, par­tic­u­larly the banks in the re­gion, are among the main in­vestors and ma­jor players in sukuk but in the last two years the liq­uid­ity has come down due to lower de­posit in­flows. How­ever, this sit­u­a­tion started limp­ing back to nor­malcy in the first half of 2017, thanks to the sta­bi­liza­tion of oil prices.

“At the local and re­gional lev­els, the banks' liq­uid­ity im­proved fol­low­ing the sta­bi­liza­tion of oil prices and also due to large is­suances of con­ven­tional bonds by GCC gov­ern­ments, and a part of the pro­ceeds was in­jected into the local and re­gional economies. At the global level, liq­uid­ity re­mained abun­dant in the first half of 2017 and we ex­pect this will con­tinue un­til the end of the year,” says Damak.

He says even the Euro­pean Cen­tral Bank (ECB)'s Quan­ti­ta­tive Eas­ing (QE) pro­gramme, the slow in­crease in the Fed's in­ter­est rates, and good liq­uid­ity in some Asian coun­tries will con­tinue to sup­port de­mand for both bonds and sukuk.

“The cur­rently dif­fi­cult op­er­at­ing en­vi­ron­ment of­fers

few op­por­tu­ni­ties for lend­ing growth and some banks might in­vest a por­tion of their liq­uid­ity in as­sets that gen­er­ate higher in­come than cash and money mar­ket in­stru­ments. In this con­text, bonds and sukuk ap­pear more at­trac­tive than in­ter-bank or cen­tral bank de­posits, driv­ing fur­ther in­ter­est in the sukuk mar­ket,” says Damak.

Sce­nario in Qatar

In the wake of the diplo­matic rift be­tween Qatar and three other GCC coun­tries, and the de­mand for project fund­ing on the rise in Qatar, the cri­sis and po­lit­i­cal risks may have damp­ened the de­mand for Qatar-re­lated sukuk in ad­di­tion to the rat­ing de­te­ri­o­ra­tion de­spite their rel­a­tively strong fun­da­men­tals in gen­eral.

How­ever, Damak be­lieves liq­uid­ity will con­tinue to leak into the sukuk in­dus­try from de­vel­oped markets, al­though this might be tem­pered by the re­cent de­vel­op­ments in the GCC. For Qatar, the vol­ume of is­suance, both do­mes­tic and in­ter­na­tional, will de­pend on how the re­cent events evolve in the com­ing days.

“We are of the view that re­cent events will re­sult in a higher ner­vous­ness and lower ap­petite from in­vestors, and higher costs for Qatari is­suances. It re­mains to be seen for how long the cur­rent sit­u­a­tion will per­sist and how it will be re­solved. In the ab­sence of any sig­nif­i­cant im­prove­ment, we do not fore­see large is­suance from Qatari is­suers. Fi­nanc­ing needs may also de­cline if non-core projects are de­layed,” says Damak.

Hani Ibrahim says that, given the cur­rent diplo­matic cri­sis, en­ti­ties need to care­fully con­sider the di­ver­si­fi­ca­tion of their sources of cap­i­tal. “The global markets are a very deep source of cap­i­tal, both in bond and Sukuk for­mat, and will form a greater share of the sources of fund­ing for projects in Qatar, which can be in the form of cor­po­rate/ sov­er­eign bonds and Sukuk, or through project-spe­cific struc­tures such as project fi­nance or pub­lic-pri­vate-part­ner­ships,” he says.

In or­der to ac­cess these sources of cap­i­tal, en­ti­ties need to pre­pare and be ready for the trans­parency, dis­clo­sure and due dili­gence re­quire­ments of this in­vestor base, he says, adding that many of the GCC sov­er­eigns have al­ready ac­cessed the sukuk mar­ket in the first half of 2017.

“THE GLOBAL MARKETS ARE A VERY DEEP SOURCE OF CAP­I­TAL, BOTH IN BOND AND SUKUK FOR­MAT, AND WILL FORM A GREATER SHARE OF THE SOURCES OF FUND­ING FOR PROJECTS IN QATAR, WHICH CAN BE IN THE FORM OF COR­PO­RATE/ SOV­ER­EIGN BONDS AND SUKUK, OR THROUGH PROJECT-SPE­CIFIC STRUC­TURES SUCH AS PROJECT FI­NANCE OR PUB­LIC-PRI­VATE PART­NER­SHIPS.” HANI IBRAHIM Man­ag­ing Di­rec­tor and Head of Debt Cap­i­tal Markets QIn­vest

“We un­der­stand there is a healthy pipeline of trans­ac­tions which are look­ing to ac­cess the mar­ket from Septem­ber on­wards. Many of these are likely to be from gov­ern­men­tre­lated en­ti­ties (GREs) and fi­nan­cial in­sti­tu­tions. Fo­cus­ing on Qatar, we could see some sukuk ac­tiv­ity in the rest of 2017 and into 2018 as the en­ti­ties look to di­ver­sify their in­vestor base. A sukuk al­lows these en­ti­ties to ac­cess the global in­vestor base by us­ing a stan­dard­ized, glob­ally-recog­nised and listed in­stru­ment,” he says.

Qatari firm strikes gold

Doha-based Ez­dan Hold­ing Group, one of the largest real es­tate devel­op­ment com­pa­nies in the GCC and ranked 42nd in the all-in­dus­tries cat­e­gory on the Forbes list of 500 largest Arab cor­po­ra­tions in 2015, made its de­but in the sukuk mar­ket by is­su­ing a $500 mil­lion (QR1.82 bil­lion) sukuk, which is the largest real es­tate cap­i­tal mar­ket trans­ac­tion from Qatar.

Is­sued in May 2016, the Ez­dan sukuk was the first cor­po­rate sukuk in 2016 from Qatar and was well re­ceived by in­vestors, de­spite mak­ing its de­but, be­cause of the rep­u­ta­tion of the com­pany as a lead­ing player in the real es­tate mar­ket, and was over­sub­scribed 1.67 times by 71 in­vestors. The sukuk is the first tranche of $2 bil­lion (QR7.28 bil­lion) which was ap­proved by the com­pany's share­hold­ers in April 2016.

The sukuk was sub­scribed by a good mix of in­vestors both by ge­o­graphic area and in­vestor type. In­vestors from the Mid­dle East took the big­gest chunk of the sukuk and by in­vestor-type banks took up the of­fer­ing. The sukuk was is­sued on May 18 and even­tu­ally gen­er­ated a to­tal or­der book of around $800 mil­lion (QR2.91 bil­lion) by in­vestors from var­i­ous ge­ogra­phies in­clud­ing MENA, Europe and Asia, demon­strat­ing strong in­vestor ap­petite for de­but is­suers with ro­bust credit pro­files de­spite the volatile mar­ket en­vi­ron­ment.

Me­dia re­ports said that Qatari con­glom­er­ate Al Faisal Hold­ing was plan­ning to tap in­ter­na­tional debt markets for the first time to raise around $200 mil­lion (QR728 mil­lion) via a US dol­lar-de­nom­i­nated Is­lamic bond.

The group has re­port­edly re­ceived banks' pro­pos­als for an Is­lamic bond, or sukuk, and is also said to be con­sid­er­ing se­cur­ing a loan con­nected to the Is­lamic debt is­suance. How­ever, the size of the planned loan was not made available.

Be­sides these two firms, an­other real es­tate com­pany , Katara Hos­pi­tal­ity, was also said to be seek­ing to raise US dol­lar debt.

Ma­jor debt in­stru­ment

Qatar Cen­tral Bank con­sid­ers sukuk as one of the ma­jor gov­ern­ment debt in­stru­ments used by the gov­ern­ment to pro­vide the nec­es­sary liq­uid­ity for project fund­ing and as one of the mon­e­tary pol­icy in­stru­ments and low-risk in­vest­ment in­stru­ments as well.

Qatar Fi­nan­cial Cen­tre Au­thor­ity (QFCA) chief eco­nomic ad­viser Dr Haitham Al Salama says Qatar has been among the most ac­tive is­suers of sukuk, or Is­lamic bonds, with last year's sov­er­eign is­suance at­tract­ing the at­ten­tion of global in­vestors, espe­cially those from Asia.

He says con­ven­tional bonds and sukuk have huge po­ten­tial to sup­port the so­cial and phys­i­cal in­fras­truc­ture needs across the Mid­dle East and estab­lish­ing a ro­bust mar­ket in­fras­truc­ture to sup­port sukuk is­suance would be key in mak­ing the mar­ket more glob­ally ac­ces­si­ble.

Ad­dress­ing a con­fer­ence en­ti­tled “Bonds, Loans and Sukuks Mid­dle East” in Doha re­cently, he says there is tremen­dous po­ten­tial in the sukuk mar­ket and as the de­mo­graph­ics im­prove in the Mus­lim world the sukuk mar­ket would evolve and de­velop.

Em­pha­siz­ing the im­por­tance of the grow­ing sukuk mar­ket, Haitham said: “More coun­tries are in­te­grat­ing sukuk into their tax codes, espe­cially as the suc­cess of sukuk and Is­lamic fi­nance be­comes more ap­par­ent.”

Sukuk as a niche prod­uct de­liv­ers a more sta­ble re­turn com­pared to reg­u­lar bonds, he said, adding that in­creas­ing in­vestor de­mand made coun­tries work on the in­te­gra­tion of sukuk into their reg­u­la­tions, in­clud­ing tax regimes.

Ma­jor im­ped­i­ment

Damak be­lieves stan­dard­iza­tion to be one of the ma­jor im­ped­i­ments to the growth of the sukuk and Is­lamic fi­nance in­dus­try. There has been some progress on re­duc­ing the com­plex­ity of is­suance, but the process for sukuk is­suance is still more com­plex and time-con­sum­ing com­pared with con­ven­tional in­stru­ments, he feels.

He fur­ther says that sukuk is­suance in the GCC will re­main rel­a­tively good for the re­main­der of 2017. Given the cur­rent low in­ter­est rates in de­vel­oped markets, emerg­ing mar­ket is­suers with good credit sto­ries might still be on in­vestors' radar, as shown by the sig­nif­i­cant over­sub­scrip­tion of some re­cent trans­ac­tions, he adds

“MORE COUN­TRIES ARE IN­TE­GRAT­ING SUKUK INTO THEIR TAX CODES, ESPE­CIALLY AS THE SUC­CESS OF SUKUK AND IS­LAMIC FI­NANCE BE­COMES MORE AP­PAR­ENT.” DR HAITHAM AL SALAMA Chief Eco­nomic Ad­viser QFC Au­thor­ity

Newspapers in English

Newspapers from Qatar

© PressReader. All rights reserved.