Sukuk Market Starved of Benchmark Sovereign

March 25, 2010 by · Leave a Comment 

By Carolyn Cohn and Shaheen Pasha

LONDON/DUBAI, March 23 (Reuters) – Sovereign borrowing still eludes the Islamic bond, or sukuk, market, leaving investors hungry for a benchmark issue to reinvigorate trading after the credit crunch and the Dubai World crisis.

Where issuance from euro zone and emerging market borrowers in 2010 has been fast and furious, with emerging market borrowers alone issuing over $50 billion, there have been no sovereign sukuk issues at all.

Only one international sukuk has been issued so far this year, a $450 million Islamic bond for Saudi property developer Dar al-Arkan.

A resolution of debt woes at state-owned Dubai World, the mounting of domestic regulatory hurdles for issuers and improved liquidity could bring sovereigns to the sukuk market from around the third quarter.

But for now borrowers have been deterred by thin trading, the extra premium which borrowers have to pay to attract investors into this relatively small and specialist market, question marks over sovereign guarantees and regulatory conundrums.

“There is genuine need for issuance,” said Muneer Khan, partner and head of Islamic finance at law firm Simmons & Simmons in Dubai.

“Government-related issuances and good credit corporate issuances can often open the gates for further corporates.”

A sukuk is similar to a bond but complies with Islamic law, which prohibits the charging or payment of interest.

The typical path for any debt market is that the initial borrowers are sovereigns, seen as relatively risk-free, followed by state-owned entities, and then by corporate borrowers who will offer a higher yield.

“If sovereigns get deals away at a certain level, corporates should trade 30-40-50 basis points above,” said a London-based Islamic finance specialist.

But without sovereign deals, it is hard for corporates to follow.

The Philippines last week shelved plans for a debut sukuk issue, citing legal hurdles.

Indonesia, which has previously issued in the sukuk market, has no plans to issue again before September.

Gulf borrowers such as Bahrain and Dubai have also previously issued sukuk. But trading is weak after the shock payment standstill on Dubai World debt, which includes Islamic debt, and other defaults in a market once boasting a zero default rate.

In addition, the lack of a government guarantee for some state-owned Dubai World debt came as a shock to many investors.

Sukuk prices are generally trading below par and the market is highly illiquid, market participants say, even as benchmark emerging sovereign debt spreads are trading at their tightest over U.S. Treasuries in nearly two years.

Global sukuk issuance is likely to range between $15-17 billion in 2010, down from $19 billion last year, a recent Reuters poll shows. Currently even those forecasts look ambitious — in 2009, nearly all sukuk issues were made by states and quasi-sovereign entities.

“The sukuk market has been doubly affected by the downturn and the situation in the Middle East, so people are not pushing ahead — it’s not an easy market for a first-time borrower,” said Farmida Bi, partner at law firm Norton Rose in London.

European sovereigns have failed to issue any sukuk at all.

The UK was at the forefront of plans for sukuk issuance, and has the legal framework in place. But its original plans coincided with the outbreak of the global financial crisis, and the country has since saddled itself with huge amounts of debt.

“The reality is that the UK government has to fund a 178 billion pound ($266 billion) deficit,” said the Islamic finance specialist.

“To come to the market with a $500 million to $1.0 billion sukuk is not the highest on their priority list.”

France was also hoping to issue a sukuk but has become bogged down in legal changes, and market participants say sukuk issuance in countries such as Turkey remains some way off.

However, there are a few signs of light.

Investors are awaiting a restructuring any day of $26 billion in Dubai World debt, which will draw a line under the four-month old problem.

“The more positive news that comes for resolutions, the better,” said Khan. “It can’t hinder further issuances, but it could help.”

Sovereigns such as Jordan and Kazakhstan have said they want to issue sukuk for the first time, although there is no set timing.

And as markets around the world recover, led by emerging debt which is seeing strong demand, sukuk could yet attract investors.

According to a Gulf regional banker at a major investment bank: “The sukuk market is a natural follower of the debt capital markets and we’re starting to see more activity there. There is liquidity in the bond market.”

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Democratization in the Former Islamic Majority Soviet Republics

March 18, 2010 by · Leave a Comment 

By Geoffrey Cook, MMNS

The Case of Kazakhstan

In looking for a unique subject to write on, your author came upon some of his notes of a discussion with an ethnic Kazakh (or the citizen of the newly independent Kazakhstan).  The “new” nation is now the ninth largest country in the world in geographical area, but only the sixty-second in population because of the largess of its open spaces.  In this essay the name of the source, place and date of the interview will be kept anonymous because of the possible political ramifications of my interviewee’s comments.

The newly independent land in Central Asia, separated from its Islamic roots for several centuries, had been violently Russified (made in the image of the Slavs in Saint Petersburg), and secularized over a period of their captivity under the Russian Empire, and later under the policy of secularization after the Communist Revolution in the European Center of the U.S.SR.  It has only been recently (1991) that they have gained independence from Moscow, and have been able to connect with the remainder of the Islamic World, and for this reason Islam, tinged with the Soviet secularism currently found in Central Asia, is developing its unique Muslim modernism of its own.

Kazakhstan, because of Josef Stalin’s policy of internal deportation within the (former) Union of Soviet Socialist Republics, is an ethnically diverse Republic (where many of its contemporary citizens are descended from unwilling immigrants…much like Afro-Americans in the Western Hemisphere).  Therefore, religious freedom is granted to all.  Yet, Kazakh Muslims dominate the social landscape.  As in all the Commonwealth of Independent States (CIS), a loose organization of the (now) independent (post-) Soviet (Colonial) States, the societal environment has been in a flux into the first decade of this new century.  In fact, Altmay, the then capital of the Kazakh Republic was the last to declare its sovereignty of the non-Russian territories (to do so far).  Many of these Central Asian and Eurasian States have often held on to the past U.S.S.R. political paths with its bureaucracy, and their methodologies still dominate although with the younger generation pushing for Western-style economic “liberalization” and (democratic political reforms are gaining interest).  The question that was being asked in this lunchtime meeting was is Kazakhstan the next Central Asian Republic to go down the path toward Western ways?

The dominant feeling amongst the Kazakhstanis was that political reorganization was absolutely necessary, but most other States in the region discouraged such restructuring because of the threat to the financial and procedural status quo.  Within Kazakhstan itself, the Russian period has exited with an enormous embedded corruption.  One of the hefty problems is the remaining clannishness within the culture – especially the ruling elite.  The strongest clan actors – whether blood relations or not — are those who owe their allegiance to the Executive and the Bureaucrats – especially in the new center, Astana.  These political actors make most of the States’s decision without any larger (more democratic) consultation.  “The Presidency is controversial,” since it supports an economic “liberalization” that is Neo-Ricardian in form, and has gained the imprimatur of most of the international organizations — who matter – as the way to stabilize their economy.  Although Kazasthan is struggling to rediscover its Islamic roots, its Civil Society has not protested its strategy of the development corrupt of a new un-Islamic State-controlled neo-Capitalism.  Kazakhstan’s government has opted for a similar market economy as most of the post-Marxist States of the old Soviet Union, and has not incorporated any Islamic financial procedures at all.  Both the Capitalist and Leninist theories have to be adjusted to fit into the Muslim monetary tradition.  “Our President is the founder of [the modern Kazakhi] ” predatory financing!  The current Administration is leading the country into a systemic process of privatization.

One of the post-Communist Republic’s largest challenges is that of political secession.  The ruler is an oligarch (one of a group of wealthy decision makers with the State itself).  There is a great possibility that his eldest daughter will succeed him into the State Executive’s office in time.  Officials and businessmen will grab “shares” of the Commonwealth while the bureaucracy, in classic totalitarian fashion has been employed to develop policy; and, thus, to maintain the rapacious State; and, consequently, to assist the elites to control and oppress, for the President is concerned over any feasible democratic opposition that may arise.  It is largely his peers within the Oligarchy who supports the status quo.  Yet contenders are arising, and Kazakhstan is nominally a two-party State, but, still, the laws have been crafted to discourage challengers.  In fact, two of the leaders of the “loyal” opposition have been persecuted as enemies of the State.

In this emergent nation, free again to dig deeply into its Muslimness, Islam itself is being discouraged through its Socialist past.

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