Sovereign Sukuk issuances by Gulf Cooperation Council (GCC) countries to finance large-scale infrastructure projects will most probably fail to take place this year, despite expectations to the contrary by some quarters.
“I do not think it is necessarily a product you will see in the immediate future. We are probably looking at next year or the year beyond in terms of the development of the product, but I do not expect to see it this year,” said Anzal Mohammed, a UAE-based partner with legal firm Allen & Overy. He added that investors would have to be comfortable with the longer tenor of the sovereign Sukuk issuances for such large-scale infrastructure projects.
A report by Kuwait Finance Centre or Markaz suggests that there may be a “jump” in sovereign Sukuk issuances, as governments try to push large-scale infrastructure projects or try to plug their budget deficits due to weaker oil prices.
The governments of Qatar and Abu Dhabi in the UAE have already announced the issuance of sovereign bonds while Bahrain plans to issue a three-year sovereign bond. It has already mandated three lead arrangers for its US$500 million Sukuk issue that will help it reduce its budget deficit because of lower oil revenues. Turkey is reported to be mulling over a debut sovereign Sukuk, indicating an interest in the instrument outside the GCC region.
While lauding the introduction of innovative Islamic financing instruments, some practitioners are concerned about what they see as a lack of proper regulatory measures in the Sukuk market, ranging from the type of issuances to credit ratings. Mohammed, however, believes that given the various schools of thought on what constitutes Shariah compliance, regulators would not view the instruments in like manner.
“People will have different views, so it is important to encourage debate and innovation instead,” he commented. On calls for a set of unified, globally accepted standards in Islamic finance, he said, “I don’t think we will get there and I don’t think we necessarily need to.”
Mohammed has been involved in various international Sukuk transactions in the Middle East, including the debut Sukuk issue by Dubai Electricity and Water Authority and the convertible Sukuk issues by Tabreed, Tamweel PJSC and International Investment Group.
Commenting on the Sukuk pipeline in the GCC region this year, Mohammed said, “We may see some domestic deals in Saudi Arabia, and a couple of sovereign or sovereign-related deals in the region, but only in the last quarter or maybe early next year.”
Various numbers have been bandied about as to the value of Sukuk issuances this year. Saudi Arabia-based NCB Capital says the value of global Sukuk issuances in 2009 — at almost US$39 billion — could exceed that of 2007, with two-thirds of that from the GCC countries.
Markaz, however, believes that Sukuk issuances — which will remain sluggish in the current quarter and pick up in the second half — will not exceed that of 2007 but will be higher than last year’s figure.
By Mary Zachariah