Long-term sukuk remains well placed to face global headwinds, says Franklin Templeton CIO

Analysis Long-term sukuk remains well placed to face global headwinds, says Franklin Templeton CIO
Global challenges, triggered by rapid inflation and expected Federal Reserve rate hikes this month, topped by war in Ukraine with Russia, have thrown global markets into a selling frenzy. (Shutterstock)
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Updated 15 March 2022

Long-term sukuk remains well placed to face global headwinds, says Franklin Templeton CIO

Long-term sukuk remains well placed to face global headwinds, says Franklin Templeton CIO

RIYADH: An important financial instrument in Islamic and non-Islamic countries alike, the sukuk market has been marginally affected by global uncertainty so far.

Global challenges, triggered by rapid inflation and expected Federal Reserve rate hikes this month, topped by war in Ukraine with Russia, have thrown global markets into a selling frenzy.

To understand the impact of these headwinds on the sukuk market, Arab News spoke to Dino Kronfol, chief investment officer for Franklin Templeton Fixed Income in Dubai.

“Year-to-date performance demonstrates resilience in the face of the emerging markets selloff, early in the year, and rates volatility more recently,” said Kronfol.

He pointed out that sukuk is down approximately 2.6 percent versus 9.2 percent for emerging market bonds and 5.1 percent for investment-grade bonds.

Kronfol, who is responsible for managing the investment process and performance of the Global Sukuk and MENA Fixed Income teams, was referring to long-term instruments and not short-term three months sukuk.




Dino Kronfol, CIO for Franklin Templeton Fixed Income in Dubai

Geopolitical situation

The CIO underlined that Ukraine and Russia are remote from sukuk issuing countries and that “the linkages were not direct or easy to identify.” He highlighted that global sukuk portfolios typically have no direct exposure to Eastern Europe, including Ukraine, Russia and Belarus.

“There is nonetheless always an impact when geopolitical escalations such as (the Ukraine crisis) materialize. Yet, global sukuk’s defensive characteristics appear set to stand out once again,” he pointed out.

Global outstanding sukuk, including short-term sukuk, reached $711.3 billion in 2021, 12.7 percent higher a year ago, with the jurisdictions of GCC, Malaysia, Indonesia, Turkey and Pakistan issuing $230.2 billion of sukuk in 2021, according to Fitch Ratings. Conversely, a number of sukuk issuers defaulted in 2021, namely Serba Dinamik Holdings Berhad and PT Garuda Indonesia.

GCC credit ratings

The GCC countries, which are oil exporters, are currently among the best-positioned emerging markets to weather the ongoing crisis, explained Kronfol.

“They are benefiting from higher oil prices without any of the linkages or exposure to geopolitical events in Eastern Europe. They also retain high credit ratings and are rebuilding financial buffers to manage through potential stress,” he underlined.

Looking at the market in the broader sense, Kronfol explained that despite international uncertainty, the market impact has been minimal for global sukuk. “It is relatively well placed compared to other fixed-income sectors,” he added.

“We view recent developments as extremely serious that warrant a patient, risk-aware approach to deploying capital.”

When it comes to rising interest rates and high oil prices, which are being priced negatively by investors, global sukuk are still conversely well positioned compared to other fixed-income instruments, underlined Kronfol.

Risk management

Sukuk markets, he explained, have less duration or interest rate risk than other fixed-income sectors. “This is very helpful if rates continue to rise,” he stressed.

More encouragingly, he added, is the fact that innovation in Islamic finance has made risk management tools — to hedge against the rise in benchmark rates — more accessible so that portfolio managers can take measures to reduce the risk that comes from rising rates.

In addition, Kronfol pointed out that markets have swung a considerable way the past three months, with expectations of more than five rate hikes by the Federal Reserve still priced in, “which we think may be overdone.”

“It will prove to be a challenge for the Fed to deliver it, with growth moderating and uncertainty is compounded by the invasion,” he added.

Impact of high oil price

Higher oil prices could mean a decline in sukuk market issuance as fewer countries face the need to borrow.

Sukuk issuance dropped 12 percent to $181 billion in 2021, while sukuk issuance activity is expected to further decline to $160-$170 billion in 2022, Moody’s predicted. This would represent a marginal correction in the issuance of 6 percent.

Moody’s figures include, nonetheless, both long- and short-term sukuk. Despite challenges, long-term sukuk still managed to grow between 2020 and 2021, from $67.5 billion to around $75 billion, according to the Bloomberg Sukuk Index.  

With higher oil prices, a stronger economic recovery, and lower sovereign funding needs in GCC, sukuk issuance could slow or face a marginal decline because of the region’s strong performance, admitted Kronfol.

Economic growth

He believes that regional economic growth rates will remain strong in 2022, around 4 percent for the region, and budgets will most likely move into positive territory if fiscal discipline is maintained.

Against this positive macro backdrop, he warned global sukuk issuance might find it challenging to surpass last year’s $75 billion (long-term sukuk) in issuance.

Yet economic recovery could also mean higher sukuk prices.

“Higher oil prices are very positive for the credit trajectory of oil exporters, and with the GCC representing almost 70 percent of the global sukuk index, it is reasonable to assume credit risk to remain contained,” said Kronfol.

In fact, at $100 oil, he pointed out the GCC collectively generates an additional $150 billion in revenue, “which turns budgets and current accounts into surplus and reduces the amount sovereigns need to issue, further supporting sukuk prices.”

The CIO explained that previous (long-term) sukuk valuations have been rich, reflecting the material improvement in the balance sheets and operating environment of sukuk issuing countries.

Improved growth, as markets reopened, leading number of vaccination drives and higher oil prices account for the GCC’s strong performance, more specifically, when compared to broader emerging markets or credit markets, which had to contend with more challenging conditions since the end of last year.

“We are therefore cautious because of these (high) valuations and think maintaining some cash and a defensive posture is warranted given the uncertainty we face and the potential for market volatility. We are, however, constructive on growth and fundamentals, so we will look to add risk when markets fluctuate,” he said.

Yet despite challenges stemming that come from uncertain inflation and a change in the Federal Reserve policy, global sukuk continues to make sense for investors looking to protect and diversify their portfolios, he concluded.


Oil settles lower after hitting $90/bbl as OPEC+ considers output cut

Oil settles lower after hitting $90/bbl as OPEC+ considers output cut
Updated 30 September 2022

Oil settles lower after hitting $90/bbl as OPEC+ considers output cut

Oil settles lower after hitting $90/bbl as OPEC+ considers output cut
  • OPEC+ has begun talks on output cut at Oct. 5 meet and Russia seen suggesting OPEC+ cuts output by 1 mln bpd — source
  • US markets slide on Fed’s aggressive moves to tame inflation; US production to return after shutting for Hurricane Ian

NEW YORK: Oil prices settled lower on Thursday in choppy trading, rising above $90 per barrel and then retreating as traders weighed a worsening economic outlook against potential OPEC+ output cuts next week.

Brent crude futures settled down 83 cents at $88.49 per barrel, after rising as high as $90.12 during the session. US crude futures for November settled 92 cents lower at $81.23 a barrel.

Leading members of the Organization of the Petroleum Exporting Countries and its allies, known as OPEC+, have begun discussions about an oil output cut at their next meeting on Oct. 5, three sources told Reuters.

OPEC+, which combines OPEC countries and allies such as Russia, agreed a small oil output cut of 100,000 barrels a day at its September meeting to bolster prices.

Top OPEC producer Saudi Arabia flagged in August the possibility of output cuts to address market volatility. 

Also at the group’s last meeting, OPEC+ members agreed to stick to their forecasts for robust global oil demand growth in 2022 and 2023, citing signs that major economies were faring better than expected despite headwinds such as surging inflation.

Oil demand will increase by 3.1 million barrels per day in 2022 and by 2.7 million bpd in 2023, unchanged from last month, OPEC said in its monthly report.

One OPEC source told Reuters a cut was “likely,” while two other OPEC+ sources said key members had spoken about the topic.

Reuters reported this week that Russia is likely to propose that OPEC+ reduce oil output by about 1 million barrels per day(bpd).

“Right now, the oil market is teetering between the Fed-induced demand destruction and tight oil supplies,” said Ryan Dusek, a director in the Commodity Risk Advisory Group at Opportune LLP.

US stock markets tumbled on worries that the Federal Reserve’s aggressive fight against inflation could hobble the US economy, and as investors fretted about a rout in global currency and debt markets.

“Amid so much uncertainty, seesaw trade may be common over the next week, unless we get more clarity from OPEC+ sources on the likely size of any adjustment and what it means for previous missed quotas,” said Craig Erlam, senior markets analyst at OANDA.

The market also eased as the threat of Hurricane Ian receded with US oil production expected to return in coming days after about 158,000 bpd was shut in the Gulf of Mexico as of Wednesday, according to federal data.

In China, the world’s biggest crude oil importer, travel during the forthcoming week-long national holiday is set to hit its lowest level in years as Beijing’s zero-COVID rules keep people at home while economic woes curb spending.

Crude benchmarks remain on pace to notch weekly gains after a four-week losing streak. Early this week they rebounded from nine-month lows, buoyed by a dip in the US dollar index and a larger than expected US fuel inventory drawdown.

The dollar index dropped again on Thursday, easing off 20-year highs, indicating some more risk appetite from investors.

Further support for oil prices could come from the United States announcing new sanctions against companies that facilitated Iranian oil sales.

“I think traders have almost given up on a nuclear deal being agreed and this announcement from the US appears to be a make or break move,” said Erlam.


Saudi Arabia launches $10bn food security plan: Minister

Saudi Arabia launches $10bn food security plan: Minister
Updated 29 September 2022

Saudi Arabia launches $10bn food security plan: Minister

Saudi Arabia launches $10bn food security plan: Minister

RIYADH: Saudi Arabia, in coordination with its regional partners, has launched a food security action plan with an initial funding of $10 billion to tackle the global food supply crisis, the Kingdom’s minister of environment, water and agriculture said.

Speaking at a meeting of G20 agriculture ministers in Indonesia, Abdulrahman Al-Fadhli said the Kingdom will continue its role in helping stabilize the global food production supply chain.

On the domestic front, he added, the Kingdom has also succeeded in reducing the use of water for agricultural purposes by more than 40 percent, the Saudi Press Agency quoted him as saying.

Al-Fadhli also highlighted the Kingdom’s achievement in the agricultural sector, which according to him, grew by more than 7.8 percent in 2022 compared to the previous year. 

He said the Kingdom is applying modern techniques to boost its agriculture sector and reduce wastage of water.


PIF-owned Savvy aims to transform KSA into gaming hub with $37.8bn investment, says CEO

PIF-owned Savvy aims to transform KSA into gaming hub with $37.8bn investment, says CEO
Updated 29 September 2022

PIF-owned Savvy aims to transform KSA into gaming hub with $37.8bn investment, says CEO

PIF-owned Savvy aims to transform KSA into gaming hub with $37.8bn investment, says CEO

RIYADH: With investments worth SR142 billion ($37.8 billion), Saudi Arabia’s PIF-owned Savvy Games Group seeks to transform the Kingdom into a global gaming hub with world-class gaming companies, said CEO Brian Ward.

Ward was addressing members of the media following the announcement of the company’s strategy by Crown Prince Mohammed bin Salman on Thursday.

The investments will include SR70 billion to take several minority stakes in companies that support Savvy’s game development agenda and SR50 billion to acquire “a leading game publisher to become a strategic development partner.”

Another SR20 billion will be invested in industry partners and SR2 billion will target industry disruptors “to grow early-stage games and esports companies.”

“Savvy Games Group is one part of our ambitious strategy aiming to make Saudi Arabia the ultimate global hub for the games and esports sector by 2030,” the Saudi Press Agency quoted Crown Prince Mohammed bin Salman as saying.

Savvy's CEO Brian Ward

In the press briefing, Ward said: “Our mission will be to lead global investments in the sector.”

He said gaming and esports is the largest entertainment sector with a potential to “exceed $300 billion by 2020 and $400 billion by 2028.”

Ward said Savvy aims to accelerate the growth of the sector in the Kingdom and take advantage of Saudi Arabia’s “unique geopolitical position in the world.”

The PIF-owned company has five independent subsidiaries, including esports arm EFG, as well as Nine66, which "is building an ecosystem for game developers and studios,” and VOV company, which is building gaming and competition venues.

“We intend to make new investments in startups and (established) tech companies,” the top official said.

He also told the media that more details about the company’s acquisition deals and agreements strategy would be announced in the next six months.

Ward said the strategy unveiled on Wednesday seeks to help local gaming companies grow into global players producing world-class games.


UAE In Focus — Damac Properties targets $150m in monthly online sales by 2023

UAE In Focus — Damac Properties targets $150m in monthly online sales by 2023
Updated 29 September 2022

UAE In Focus — Damac Properties targets $150m in monthly online sales by 2023

UAE In Focus — Damac Properties targets $150m in monthly online sales by 2023

DUBAI: Damac Properties has seen significant growth in pure online sales as a result of its fully interactive virtual real estate and communities designed in the metaverse, according to a senior official.

On the sidelines of the Metaverse Assembly in Dubai, Ali Sajwani, general manager of operations at Damac Properties and CEO of D-Labs, said that online-only transactions are accounting for an increasing portion of the company’s real estate activity, approximately 367 million dirhams ($100 million) a quarter.

By mid-2023, the UAE-based developer aims to grow this figure to $150 million per month, according to a statement.

The realty major has invested up to $100 million to develop and monetize a metaverse that could allow potential customers to check into their luxury properties virtually, choose an apartment, explore furniture options and toy with the paraphernalia on offer.

The company's metaverse platform D-Labs will create digital replicas of its top projects, including Damac Hills, Damac Lagoons, Safa by De Grisogono, and Cavalli Tower in Dubai. It will also host other notable projects such as Damac Tower Nine Elms in London and the upcoming Cavalli Residences in Miami.

AD Ports Group welcomes its first international shipment 

AD Ports Group, one of the leading providers of international trade and logistics, announced Thursday the arrival of its first international shipment at Mugharraq Port, according to a statement.

The UAE’s Ministry of Energy and Infrastructure has recognized Mugharraq Port as an international port facility under the provisions of the International Code for the Security of Ships and of Port Facilities.

The port gained international recognition after a series of major upgrades including extending the quay wall and adding additional berths, deepening the facility’s depth to eight meters, and constructing additional Ro-Ro ramps.

Combined with its strategic proximity to Ruwais, Hail, Ghasha, and other key upstream oil and gas projects in the region, Mugharraq Port is well-equipped to meet the demands of international operations and will further solidify its position as an ISPS port in the region, the statement said.

As a premier maritime facility, the port offers a wide range of offshore, oil and gas, general cargo, logistic support, bulk, and break-bulk handling services.

Al Dhafra’s long-term development plan will be supported by the ongoing port extensions and the new international certification.


Goods exports fuel 18% rise in Saudi Arabia’s current account balance: SAMA 

Goods exports fuel 18% rise in Saudi Arabia’s current account balance: SAMA 
Updated 29 September 2022

Goods exports fuel 18% rise in Saudi Arabia’s current account balance: SAMA 

Goods exports fuel 18% rise in Saudi Arabia’s current account balance: SAMA 

RIYADH: Saudi Arabia’s current account balance has witnessed a 17.6 percent increase in the second quarter of 2022 to SR170.1 billion ($45.26 billion) , fueled by a rise in oil and non-oil exports, according to the Saudi Central Bank’s monthly bulletin.

The Kingdom’s exports of goods increased to SR272. 2 billion, showing a 23.1 percent surge from SR221.1 billion over the same period.  

Services such as transport and construction all witnessed declines over the second quarter of 2022, resulting in a 53.9 percent reduction in the sector.

Saudi Arabia’s foreign assets increased 2.4 percent from the first quarter of 2022, hitting SR4.9 trillion in the second quarter of 2022.

Portfolio investments — which include equity and investment fund shares and debt securities — slightly declined by 1.1 percent for the second month in a row, equating to 1.4 trillion by the end of June.

Trade credit, loans, and currency and deposits — which fall under the category of ‘other investments’ grew 2.9 percent to 1.1 trillion in this quarter, slowing down from a 9.6 percent growth in the previous quarter.

Inside the Kingdom, residential new mortgage loans to individuals soared 76.6 percent month-to-month, from SR7.2 billion in July to SR12.7 billion in August.

Moreover, consumer loans and credit card loans both increased 2.1 percent and 4.8 percent respectively from last month.

Consumer loans grew from SR436.5 billion in July to SR445.8 billion in August, and credit card loans increased from SR19.6 billion to SR20.5 billion over the same period.

As for Saudi Arabia’s total bank credit, it rose 1.6 percent — recording SR2.3 trillion worth of brank credit in the transition between July and August.