Sovereign issuance will indeed increase over the coming months, but most will be conventional rather than Sukuk. The financial rationale for Sukuk issuance is to attract funds from investors who wish to be Shariah compliant, most of whom reside in the Gulf Cooperation Council (GCC) states. These include institutional investors such as Islamic banks, Takaful operators and Islamic investment companies. However, given the collapse of property markets in the GCC and the exposure of potential Sukuk investors to these markets, institutions are giving higher priority to the recapitalization of their own balance sheets. In these circumstances, investment in overseas Sukuk is less likely. The UK Treasury has decided not to proceed with its sovereign Sukuk issuance despite the need for borrowing by the British government. The unfavorable outlook for sterling is admittedly a factor, but there is an even worse currency outlook for issuers of potential sovereign Sukuk such as Pakistan and Indonesia. I do not see the primary market in Sukuk, including US dollar-denominated Sukuk, being reignited in 2009 or indeed until the impact of the global financial crisis starts to weaken.
PROFESSOR RODNEY WILSON
I do not foresee many sovereign issuances and these are probably only coming from governments that have already announced them (Singapore, Hong Kong and Malaysia) and countries with ongoing sovereign Sukuk programs (Bahrain and Brunei). It would have been an exciting development had the UK not postponed its Sukuk. It announced in its pre-budget report that “it would not offer value for money at the present time”. I expect the Sukuk to attract investors mainly from GCC-based Islamic financial institutions looking for a safe harbor from the cooling local property market. The lack of short-term liquidity instruments should create demand among these financial institutions for lower risk government-backed Sukuk. In the past, many Western institutional investors like hedge funds bought Sukuk as an alternative asset class. The global credit market disruptions have created deleveraging among these investors and they are unlikely to reenter the primary market for Sukuk. This makes it less likely that sovereign Sukuk issues will reignite issuance in the rest of the primary market. BLAKE GOUD Principal, SharingRisk.org, Portland, US
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