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The international sukuk market, of which Malaysia accounts for some 66 per cent of global issuances, received a major boost when Saudi Finance Minister Ibrahim Al Assaf confirmed at a meeting with Christine Lagarde, managing director of the International Monetary Fund (IMF), late last month in Riyadh that the kingdom’s public debt issuance programme will not be limited to conventional bonds and that sukuk will play an important role.

The global sukuk market had a flat year in 2015, impacted by the slump in the price of crude oil and other commodities and the sluggish global economic recovery. The value of sukuk issued last year fell to US$60.7 billion (RM255 billion) from US$107 billion in 2014 partly because of Bank Negara Malaysia’s decision to stop issuing short-term ringgit sukuk.

Nevertheless, the Malaysian capital market continued its impressive growth across all segments last year, expanding by 2.1 per cent to RM2.82 trillion, equivalent to 2.5 times the size of the domestic economy. Of this, according to the Securities Commission Malaysia, the Islamic Capital Market (ICM) grew by 6.7 percent to RM1.70 trillion last year, compared with RM1.59 trillion in 2014.

The signs are of a rebound this year, with sukuk issuances already reaching US$50 billion in the first four months of the year. Since then, there has been steady traction in sukuk issuance by sovereigns in the international and domestic markets and by corporates.

In this context, the Saudi announcement and those by other Gulf Cooperation Council (GCC) states, such as Kuwait, Oman, Qatar, Bahrain and United Arab Emirates, indicating that they will also tap the international sukuk and bond markets to part finance their budget deficits, augurs well for the sukuk market next year. The Saudi Finance Ministry had also stressed that the kingdom plans to raise US$120 billion from the international markets by 2020. The kingdom’s budget deficit last year was US$98 billion. This follows the successful issuance last month by the Saudi government of a record US$17.5 billion conventional bond through three tranches in the international market — the single largest emerging market bond sale to date, surpassing the US$16.5 billion issuance by Argentina in April.

The price of oil is hovering at US$50 per barrel, which is about US$10 per barrel higher than last year. The IMF expects gross domestic product growth in Saudi Arabia to bottom out at 1.2 per cent this year, rebounding to 2.0 per cent next year. Given these economic and public financing dynamics, Islamic bankers in Malaysia and the GCC region I have spoken to are optimistic about the prospects for the sukuk market, especially over the next two years, given the increased demand for financing in these countries, including for infrastructure and in the GCC for allied development partly in the context of Dubai Expo 2020 and FIFA World Cup in Doha in 2022.

Al Assaf recently stressed that stabilising the kingdom’s net foreign assets held by the Saudi Arabian Monetary Agency (SAMA), the central bank, is a priority and that its debt issuance programme in the international markets would be an orderly process. By September, SAMA foreign holdings totalled US$546.7 billion, which, according to Al Assaf, is in “a healthy position”.

Saudi bankers have welcomed this first public announcement by the finance minister on the role of sukuk in the kingdom’s debt issuance programme. They expect a debut Saudi sovereign sukuk early next year and stress the need for a well-structured public borrowing policy in the international market, which will give confidence and certainty to international and domestic investors.

As such, the outlook for the Islamic capital market in the kingdom looks very positive. The fact that the bond was oversubscribed to the tune of US$67 billion reflects the robust latent demand in a global market starved of such papers. This was further highlighted by the fact that the pricing was tight, especially for the 30-year tranche, which was priced at 210 basis points over United States Treasuries, the same for a similar bond issued by Qatar in May.

The pricing for a Saudi sovereign sukuk could be even tighter because of the latent demand for syariah-compliant papers given that Islamic investors could not partake in the US$17.5 billion bond offering.

The challenge for Saudi Arabia is to build up a yield curve. The best way to do this is to become a frequent issuer of government papers with varying maturities, sizes and even currencies in the international markets. Frequent issuances will make the pricing tighter and at the same time offer decent yields to investors.

“The issuance was clearly aimed at international investors in China, the US and Europe, who are not familiar with sukuk. The Saudi authorities preferred a conventional issuance this time because this is what they are most familiar with and they wanted a quick closure. Perhaps in the next issuance they may opt for a mixed issuance, comprising bonds and sukuk tranches, or an entirely sukuk offering,” explained a senior Saudi banker.

SAMA supports the development of a robust ICM in the kingdom, which is the second largest issuer of sukuk after Malaysia. Government-linked entities — such as Saudi Aramco, the largest oil company in the world, and its various subsidiaries; Saudi Basic Industries Corporation, the world’s largest petrochemicals producer and exporter; and, the General Authority for Civil Aviation, in addition to a host of corporates and banks — are regular issuers of sukuk.

Sukuk as a unique fundraising instrument has a potential beyond its traditional markets and to become a truly globalised financing instrument for monetary policy and liquidity management, infrastructure and urban regeneration financing, and even for social causes, such as immunisation and monetising waqf assets. It’s up to Malaysia and Saudi Arabia to nurture this ambition and put sukuk on the global map!

Mushtak Parker is an independent London-based economist and writer

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