Islamic Bonds Asia-Gulf Gulp
While Asian and Gulf equity markets have carried disappointment this year, the Islamic sukuk bonds in and between both regions are at an “inflection point” according to a Standard & Poor’s report at $75 billion through July, $10 billion less than in all of 2011 when the respective Malaysia and GCC totals were $65 billion and $20 billion. According to Malaysia’s Securities Commission public and corporate instruments outstanding are almost $150 billion, with the latter dominated by quasi-sovereign like the Khazanah wealth fund and mortgage company Cagamas. 165 dedicated unit trusts were registered with a net asset value of $10 billion. An Islamic ETF is listed on the Kuala Lumpur exchange, and dozens of shariah advisers have been approved with local and foreign domiciles. The S&P paper points out that Gulf infrastructure issuers have been “crossing the figurative border” with ringitt placements from Abu Dhabi and Bahrain. Saudi Arabia has led the area sukuk pack to date with $9 billion in activity, followed by the UAE and Qatar. Average yields measured by benchmark global indices are at a post-crisis low of 3.5 percent, and the standard-setting Accounting and Auditing Organization has forged bilateral compliance for 80 percent of available paper. The structure, with physical collateral backing guaranteed payments, is well suited for water and power projects estimated at hundreds of billions of dollars over the next decade. Qatar must invest $65 billion to host the World Cup in 2022, and Indonesia has a $200 billion electricity and transport program set though 2015. A restructuring history especially in Dubai and Kuwait offers a precedent for future workouts despite lingering acrimony. In the $10 billion creditor dispute with Dubai Holding several banks have demanded international arbitration and rejected negotiating proposals. Asia is now the GCC’s top trade partner taking 40 percent of energy exports, and Chinese and Korean telecom and natural resource firms in particular have expanded FDI. Increasingly bond maturities are stretching beyond 10 years as previously active project lenders pare exposure under Eurozone crisis and Basel III edicts.
The survey noted Malaysia world dominance with 40 percent of the Islamic-style fixed-income space over the last 5-year strategy, while the 2020 blueprint foresees a $1 trillion market. It sees Indonesia as a distant regional second despite its far larger population as the framework still does not allow sales under beneficial ownership and pilot sovereign efforts have just begun while corporate rules are lacking. Saudi leadership in the GCC could be consolidated by activity expected under the new mortgage law, with over 1 million additional homes needed by mid- decade to satisfy demand according to officials. The agency authors have assigned ratings to a dozen transactions, and are “optimistic” about the globalization of Islamic finance even with the traditional ambivalence over exchange rate and banking and securities industry directions.
