Looking Pretty Good Sukuk

Dear Ali Sakti,

Many reports have been published on the state of the Sukuk market since the global economic crisis, portraying a bleak future. By late last year, most market players in the industry agreed that Sukuk issuances were almost at a standstill.

Sukuk defaults have not helped to forward the Islamic bond market. However, Standard & Poor’s credit analyst Mohamed Damak said that “although the defaults influenced the slowdown of Sukuk issuances, they inadvertently provided the market with useful information on how Sukuk will behave following a default”.

In its latest report, Standard & Poor’s Rating Services revealed that new Sukuk issuances had dropped to over US$9 billion in the first seven months of the year compared with US$11.1 billion during the same period last year.

Still, the Sukuk market did show signs of recovery in April with Indonesia’s Global Sukuk of US$650 million, making it the largest dollar-denominated Sukuk outside the GCC. It was also the first benchmark for a dollar-denominated Sukuk in Asia since 2007. This sovereign Sukuk whetted investors’ appetites, judging by the oversubscription of seven times to the tune of US$3 billion. Malaysia followed suit, overtaking the most populous Muslim country when the central bank, Bank Negara Malaysia, issued its US$2.5 billion Retail Saving Sukuk, a savings investment scheme for the public. This was followed by its Terengganu Investment Authority Sukuk for US$1.4 billion.

In the Middle East, the Saudi Electricity Company’s US$1.86 billion Sukuk was three times oversubscribed, while the Central Bank of Bahrain’s Sukuk was increased to US$750 million from US$500 million and oversubscribed eight times. Investors were clearly into safe investments as all the Sukuk were sovereign issuances. Kuwait Finance Centre (Markaz) head of research M R Raghu said the timing was perfect for corporates to explore the Sukuk opportunity more closely as an option, especially with the decline in bank lending and with equity shareholders unwilling to participate in recapitalization exercises. He was confident that investors would be attracted to companies with good balance sheets.

Taking heed was Malaysia’s national oil and gas company Petroliam Nasional (Petronas) when it issued its US$1.5 billion Global Sukuk. Not only was the first corporate Sukuk of the year oversubscribed, the majority of investors were from Asia, dispelling any theory that liquidity had dried up in the region. Standard & Poor’s report supports the strong demand in Asia. It stated that Malaysia took the lead as the major country of issuance for Sukuk, accounting for about 45% of total issuances in the first seven months of 2009. Saudi Arabia contributed 22% of the Sukuk issued during the same period.

Fischer Francis Trees & Watts emerging markets and Islamic investments director Rafael Martinez Dalmau believes that the Sukuk market has taken the lead in the Islamic finance industry because nothing else can be traded as actively as a Sukuk. The absence of a Sukuk market, he says, will stifle the growth of Islamic finance in the global context of a developed market. “Governments issuing sovereign Sukuk will be the way forward,” predicts Dalmau. As the dust settles from the chaos of the global financial crisis, the Sukuk market is looking to take center stage in the Islamic finance industry. How soon it will happen, only time will tell.

Best regards,
IFN team