Global sukuk sales will challenge this year’s record of $46 billion in 2013 as countries such as Oman, Tunisia and Egypt tap the market for the first time, CIMB Group Holdings Bhd. and OCBC Al-Amin Bank Bhd. say.
Borrowing costs on Shariah-compliant debt have fallen 11.4 percentage points to 2.82 percent since the end of 2008 as central banks in Europe, the U.S. and Japan pumped funds into their economies to spur growth. Demand will be driven by the rise in Islamic banking assets, which may reach $1.8 trillion next year, compared with $1.3 trillion in 2011, led by Saudi Arabia and Malaysia, Ernst & Young forecast in a Dec. 10 report.
Sales of bonds that comply with Muslim tenets jumped 25 percent in 2012 as companies sold debt as part of government programs in Asia and the Middle East to build railways, ports and roads. Thailand and South Africa have also announced plans to issue sukuk once legislation has been passed that will open up new markets for investors.
“Sukuk is an attractive channel to explore for those countries looking to expand funding sources,” Kuala Lumpur- based Alhami Mohd Abdan, head of international finance and capital markets at OCBC Al-Amin, a unit of Singapore’s Oversea- Chinese Banking Corp., said in a Dec. 21 interview. “Liquidity in the Islamic space is growing quite significantly.”
The biggest sales came out of Saudi Arabia and Qatar amid development programs of $373 billion and $130 billion, respectively. Malaysia has embarked on a $444 billion spending spree over 10 years that helped spur Islamic bond offerings to an all-time high of 95 billion ringgit ($31 billion) in 2012, data compiled by Bloomberg show.
Saudi Electricity Co. sold $1.75 billion of notes due in 2017 and 2022 in March. The yield on the five-year 2.665 percent securities has since dropped 55 basis points, or 0.55 percentage point, to 1.95 percent, according to data compiled by Bloomberg. Borrowing costs on global Shariah-compliant bonds fell 117 basis points this year and reached a record low of 2.76 percent on Nov. 30, the HSBC/Nasdaq Dubai US Dollar Sukuk Index shows.
Qatar completed a $4 billion offering in July. The yield on the 2.09 percent notes due in 2018 declined 13 basis points since the sale date to 1.97 percent.
“There’s an increasing number of governments from the Middle East and North Africa region looking to tap the sukuk market as part of efforts to widen their funding sources following the European debt crisis,” Zakariya Othman, head of Islamic ratings at RAM Ratings Services Bhd., said in a Dec. 18 interview in Kuala Lumpur. “They’re also probably doing so to meet demand from their Muslim populations as there’s now greater awareness of Islamic finance globally.”
Shariah-compliant bonds sold on the international market returned 9.5 percent this year, compared with 7.2 percent in 2011, according to the HSBC/Nasdaq gauge. JPMorgan Chase & Co.’s EMBI Global Composite Index of emerging-market securities gained 18.2 percent, versus 8.5 percent.
The difference between average yields on sukuk, which pay returns on assets to comply with Islam’s ban on interest, and the London interbank offered rate narrowed 94 basis points in 2012 to 179 basis points as of Dec. 24, according to HSBC.
In Malaysia, borrowing costs on the 3.928 percent dollar- denominated Islamic notes due in 2015 dropped one basis point this month to 1.31 percent, near the all-time low of 1.28 percent reached on Dec. 14, according to data compiled by Bloomberg. The difference between Dubai’s 6.396 percent securities maturing in November 2014 and Malaysia’s debt narrowed 14 basis points in December to 77 basis points as of Dec. 24.
The Bloomberg-AIBIM Bursa Malaysia Sovereign Shariah Index of the most-active ringgit-denominated bonds rose 3.7 percent in 2012 to 109.5980 and touched a record of 109.882 on Nov. 8.
Central banks in the U.S., Japan and Europe have eased monetary conditions to support growth. The Federal Reserve has pledged to keep borrowing costs near zero until late 2014, while rates in the euro area and Japan are at 0.75 percent and zero to 0.1 percent, respectively. That compares with 2 percent in Saudi Arabia, 3 percent in Malaysia and 5.75 percent in Indonesia.
Issuers will be encouraged to tap the sukuk market as demand increases with a growing pool of wealth seeking Shariah- compliant assets, according to OCBC Al-Amin Bank.
Government Islamic securities accounted for 18 percent of the total global issuance this year, with Qatar, Indonesia, Turkey and the United Arab Emirates completing offerings.
“We expect to see issuance from new jurisdictions in Asia and Europe in 2013,” Mohamad Safri Shahul Hamid, the Kuala Lumpur-based deputy chief executive officer at CIMB Islamic Bank Bhd., a unit of CIMB Group, said in a Dec. 20 e-mail. “The benign interest-rate environment would also help spur the sukuk market in the near to medium term.”