The simple answer is that unless there IS product innovation the chances of Qatar raising the investment it needs will be minimal in view of the systemic shortage of bank capital, which will probably not be ameliorated in less than 10 years, if ever. In that context, I agree with economists such as Willem Buiter and Nassim Taleb among others that the solution to the financial crisis can only come from a new approach to equity, rather than variations on debt. This opens the way to genuinely Islamic Sukuk, rather than the substitute versions in common use today.
CHRIS COOK
Qatar has very ambitious development plans, although US$160 billion may be an over estimate of its likely expenditure during the next five years given the discrepancy that has usually prevailed between what is planned and what is actually implemented. Nevertheless substantial amounts of government funding will be required, much of which will be raised conventionally. Qatar has limited experience of Sukuk issuance. Although it was a pioneer with the first sovereign global Sukuk issuance in the GCC worth US$700 million in 2003, there were no further issuances until this year. In May, both Qatar Diar, a development company, and Qatar Islamic Bank raised US$750 million each through Sukuk issuances and Qatar Central Bank raised a further US$343 million in June. These used well proven Ijarah structures. More Sukuk issuances are likely given the revival of interest in Shariah compliant funding and funding needs, but don’t expect a huge amount of issuance or innovative structures as the issuers are likely to proceed cautiously and are mainly concerned with not paying too much for funding. PROFESSOR RODNEY WILSON Director of postgraduate studies, Durham University
The capital expenditure announced by Qatar is not solely government related. A significant part appears to be associated with Qatar’s private sector. As far as government expenditure is concerned, the Qatar government has multiple choices to finance the projects, one of them being the issuance of Sukuk. Considering that many of the projects announced are infrastructure related, any Sukuk or other form of (government) debt issued will likely need to be for a longer period than has been usual in the region. Not only will this enhance the yield curve further, it will also fulfil the need of insurance companies to have long-term, stable investments on their books. DR NATALIE SCHOON Head of product research, Bank of London and the Middle East
The needs for capital for infrastructure and other projects are large, but the Sukuk market is still relatively small. The issue, particularly in the GCC, with new Sukuk issuance is not of product innovation, but one of developing robust secondary markets. While there are many hold-to-maturity investors that would consider sovereign Sukuk, there remains a premium on Sukuk versus conventional bonds because of their illiquidity. With GCC yield spreads elevated, even sovereign issuers may favor conventional bonds over Sukuk because of pricing that includes an illiquidity premium. One example, that is not necessarily indicative for Qatar, but is instructive nonetheless is Indonesia. The demand for Indonesian Sukuk is there, but the yields asked for by investors have in many cases been too high for the government to accept. It is not directly analogous to Qatar, but it does illustrate the existence of an “illiquidity premium”. When one talks about more than US$100 billion in Sukuk, even a slight premium may become an obstacle and secondary markets do not develop overnight. It is likely that no more than a small fraction of the capital expenditure from Qatar will be raised through Sukuk, not because there is some product innovation necessary, but simply because investors will demand a higher return for an investment for which secondary markets are illiquid. BLAKE GOUD Principal, Sharing Risk dot Org
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