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)
Short Url
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.


Bahrain-based Eat App raises $11m in a series B funding

Bahrain-based Eat App raises $11m in a series B funding
Updated 28 September 2022

Bahrain-based Eat App raises $11m in a series B funding

Bahrain-based Eat App raises $11m in a series B funding

RIYADH: Bahrain-based restaurant reservation platform, Eat App, raised $11 million in a series B funding round.

The funding round included venture capital firms MEVP, 500 Startups, Derayah VC, Dalah Albaraka, Ali Zaid Al-Quraishi and Brothers, and Rasameel Investment Company.

The firm seeks expand globally and invest in product development to support restaurants and guest experience.

“Looking back, the pandemic impacted Eat App greatly. While it caused a drop in revenue, it was also one of the largest accelerators of the business, as restaurants were forced to implement digital tools,” Nezar Kadhem, co-founder and CEO of Eat App, said in a statement.

Founded in 2015, Eat App currently operates in Bahrain, Dubai, Abu Dhabi, and Doha, with more than 800 restaurants on its platform.


Aramco’s Wa’ed Ventures leads French AI firm Alteia’s funding round

Aramco’s Wa’ed Ventures leads French AI firm Alteia’s funding round
Updated 28 September 2022

Aramco’s Wa’ed Ventures leads French AI firm Alteia’s funding round

Aramco’s Wa’ed Ventures leads French AI firm Alteia’s funding round

RIYADH: Alteia, a European artificial intelligence and industrial software company, announced that it closed its latest funding round led by Wa’ed Ventures, Saudi Aramco’s venture capital arm.

Alteia will utilize its funding to increase its presence in the Kingdom by opening an office in Dhahran to support companies in the region as well as invest in research and development.

“To have the world’s leading energy company invest in Alteia through its investment arm is a strong show of faith in our trajectory, and weighs in the value of contextualized, actionable visual data as the foundation to shape a more efficient, more sustainable industrial future,” Benjamin Benharrosh, co-founder of Alteia, said in a statement.


Egypt B2B marketplace Mazaya raises $5m in pre-seed round

Egypt B2B marketplace Mazaya raises $5m in pre-seed round
Updated 28 September 2022

Egypt B2B marketplace Mazaya raises $5m in pre-seed round

Egypt B2B marketplace Mazaya raises $5m in pre-seed round

RIYADH: Mazaya, an Egypt-based B2B e-commerce marketplace, raised $5 million in a pre-seed round, said a statement issued on Tuesday.

The funding round was led by financial investment firm Raya Trade and Distribution, it added.

The company will use the funds to boost its operation in Egypt as well as expand into new markets and other verticals.

“The funds raised will allow us to quickly scale our operations and expand to other markets beyond Egypt, we have plans to launch our services in Nigeria before this year-end,” Amir Aboul Fotouh, Mazaya co-founder, said.

The Mazaya App provides retailers and merchants of electronic goods and home appliances the ability to procure inventory for their stores from all major brands.

“The platform conveniently supports merchants, particularly small merchants who do not receive adequate services, with the ability to scale their business through a superior level of service and a wide range of electronic devices from all international and local brands at the click of a button,” Bassem Megahed, CEO of Raya Trade and Distribution, said in a statement.

The company also plans to offer financial services and support to their retailers by offering credit facilities and flexible payment options.


Russia to spend $55bn from rainy-day fund to cover 2022 budget gap

Russia to spend $55bn from rainy-day fund to cover 2022 budget gap
Updated 28 September 2022

Russia to spend $55bn from rainy-day fund to cover 2022 budget gap

Russia to spend $55bn from rainy-day fund to cover 2022 budget gap

MOSCOW: Russia plans to spend 3.19 trillion roubles ($54.62 billion) from its National Wealth Fund this year to cover its budget deficit, a draft budget published on the finance ministry’s website showed on Wednesday, according to Reuters.

In 2023, Russia intends to spend 1.95 trillion roubles on budget deficit financing from the NWF, a rainy-day fund made up of oil and gas revenues, and another 643.7 billion roubles in 2024.

The ministry intends to issue 2.5 trillion roubles worth of OFZ treasury bonds as it seeks to ramp up domestic borrowing in 2023, the document showed.

In 2024, the ministry plans to borrow 3.4 trillion roubles and another 3.4 trillion roubles in 2025.


MENA Project Tracker — Petrofac contract extended; ASHGHAL requests pre-qualification document 

MENA Project Tracker — Petrofac contract extended; ASHGHAL requests pre-qualification document 
Updated 28 September 2022

MENA Project Tracker — Petrofac contract extended; ASHGHAL requests pre-qualification document 

MENA Project Tracker — Petrofac contract extended; ASHGHAL requests pre-qualification document 

RIYADH: Iraq has approved a project to build a $50 million industrial city in tandem with its post-war reconstruction initiative, reported Zawya.  

Located in the center of the Najaf Governorate, the new city will stretch over 9.5 sq. km, and encompass many different industries such as petrochemicals, lubricants, glass and detergents.

“This project will provide 5,000 jobs to Iraqis and its cost could exceed $50 million…we have received cabinet approval and have already selected a contractor,” said Dirgham Kiko, chairman of the Najaf Investment Commission.

It is expected to be completed within two years.

Petrofac’s contract extended in the Haliba oil field

UK-based Petrofac will continue supporting operations at the Haliba oil field in Abu Dhabi for the next two years, according to an agreement with Al-Dhafra Petroleum — a subsidiary of Abu Dhabi National Oil Co. Group.

Al-Dhafra Petroleum originally selected Petrofac for this contract in September 2019, reported MEED.  

ASHGHAL requests pre-qualification documents

Qatar’s Public Works Authority has requested prequalification documents for four construction contracts that make up the South of Wakrah and New District of Doha pumping station and outfall scheme, reported MEED.

The contract has been tendered since mid-August, and bids will be closed by Oct. 23.