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.


Mohammed Bin Rashid Aerospace Hub to open region’s first vertical aerospace complex

Mohammed Bin Rashid Aerospace Hub to open region’s first vertical aerospace complex
Updated 9 sec ago

Mohammed Bin Rashid Aerospace Hub to open region’s first vertical aerospace complex

Mohammed Bin Rashid Aerospace Hub to open region’s first vertical aerospace complex
  • Facility will offer 86 leasable units in bid to attract SMEs, startups

DUBAI: Mohammed Bin Rashid Aerospace Hub at Dubai South announced that its Suppliers Complex, the first vertical aerospace facility in the region, will be completed in September, Emirates News Agency reported.

The facility is seeking to attract SMEs and startups by providing solutions for multipurpose activities.

The Suppliers Complex is a G+3 development with more than 12,000 square meters of light industrial space, allowing aerospace companies to quickly establish operations.

The facility has 86 leasable units for companies that provide maintenance services, trade aircraft parts, and operate aircraft as well as drones.

“The new facility is in line with our mandate to provide the aviation industry with the required infrastructure and facilities to set up their businesses as part of the overall ecosystem that we have at MBRAH,” MBRAH CEO Tahnoon Saif said.

“We are also offering exclusive incentives to companies, mainly startups and SMEs, and we will spare no effort to cement Dubai’s position on the world aviation map,” Saif added.

MBRAH is a free-zone destination for the world’s leading airlines, private jet companies and associated industries. The hub provides high-level connectivity to global aerospace players.

Home to maintenance centers as well as training and education campuses, MBRAH aims to strengthen Dubai’s engineering industry and realize the emirate’s vision of becoming a leading aviation hub.

 


Qatar sees 12-fold jump in surplus on energy profit

Qatar sees 12-fold jump in surplus on energy profit
(Getty)
Updated 19 August 2022

Qatar sees 12-fold jump in surplus on energy profit

Qatar sees 12-fold jump in surplus on energy profit

RIYADH: Qatar witnessed a 12-fold jump in its budget surplus to 47.3 billion riyals ($12.8 billion) in the first half of 2022, compared to 4 billion riyals in the same period last year, driven by soaring energy revenues.

Oil and gas revenue surged 58 percent to 150.7 billion riyals during the period, recompensating the increased government spending on wages and salaries, Bloomberg reported citing data.

Qatar revenues are mainly generated by long-term contracts to supply liquefied natural gas, typically tied to the price of oil. 

The Gulf country is benefiting from Europe’s interest in diversifying its gas supply away from Russia in the long-term. Qatar tries to tie up buyers for new LNG contracts for very long period, Bloomberg said.

The International Monetary Fund projected the country’s economy will grow 5.4 percent this year and generate a surplus equivalent to about $45 billion. 

Qatar is preparing to host this year’s soccer World Cup.

The World Cup organizers have said they’re anticipating a $17 billion boost to the country from hosting the soccer tournament.


Abu Dhabi eyes double money through Miami Hotel record selling price

Abu Dhabi eyes double money through Miami Hotel record selling price
(Shutterstock)
Updated 19 August 2022

Abu Dhabi eyes double money through Miami Hotel record selling price

Abu Dhabi eyes double money through Miami Hotel record selling price

RIYADH: Abu Dhabi sovereign wealth fund is exploring the sale of the Miami Beach Edition Hotel in which the property could fetch more than $580 million, as it is seeking to more than double its money.

This deal would mark a record on a price-per-room basis for the Miami market, Bloomberg reported citing people familiar with the matter.

Abu Dhabi Investment Authority, also known as ADIA, acquired the Edition for $230 million in 2015 from Marriott International. 

The hotel has 294 rooms and suites including oceanfront bungalows, and restaurants designed by Jean-Georges Vongerichten, according to its website.

ADIA is working on exploring the interest of potential buyers with an adviser, one of the people said, asking to be anonymous. ADIA spokesman declined to comment to Bloomberg. 


Saudi Arabia, Uzbekistan sign agreement in the energy field

Saudi Arabia, Uzbekistan sign agreement in the energy field
Updated 19 August 2022

Saudi Arabia, Uzbekistan sign agreement in the energy field

Saudi Arabia, Uzbekistan sign agreement in the energy field

JEDDAH: Saudi Arabia’s Ministry of Energy signed a memorandum of understanding with its Uzbek counterpart on August 18, to develop cooperation and exchange information and experiences between both countries, in the energy field, Saudi Press Agency reported.

This comes on the second day of the Saudi-Uzbek Business Council in Jeddah, that was held on the sidelines of the visit of the Uzbek President Shavkat Mirziyoyev to the Kingdom.

This deal covers the areas of petroleum, gas, electricity, renewable energy, energy efficiency, petrochemicals, and hydrogen.

It also includes the circular carbon economy and its technologies with the aim of limiting the effects of climate change, such as carbon capture, reuse, transport and storage.

Saudi Arabia and Uzbekistan have already signed over 10 investment agreements, worth over SR45 billion ($12 billion), on Wednesday, covering different sectors.


IsDB, Uzbekistan strengthen cooperation

IsDB, Uzbekistan strengthen cooperation
Updated 19 August 2022

IsDB, Uzbekistan strengthen cooperation

IsDB, Uzbekistan strengthen cooperation

JEDDAH: Islamic Development Bank President Mohammed Al-Jasser met with Uzbekistan President Shavkat Mirziyoyev on August 18 to discuss strengthening cooperation between both parties, Saudi Press Agency reported.

A letter of intent was signed during the meeting to provide a framework for facilitating cooperation, promoting rapid processing and approval of projects and operations that are part of the work program of the IsDB Group for Uzbekistan in 2022.

The meeting comes on the second day of the Uzbek President's visit to the Kingdom.

Mirziyoyev stressed that his government has implemented comprehensive reforms with the aim of improving the business and investment environment, enhancing regional cooperation, improving the agricultural sector, and promoting innovation and entrepreneurship to reach the goal of achieving dignity for all people by 2026.

Both parties reviewed views on the National Development Strategy of Uzbekistan 2026, and agreed on the need to align the bank's country strategy with the national document, a task that will be worked on as a priority, according to Al-Jasser.

The two sides also emphasized the need to facilitate the joining of more co-financiers to participate in financing larger projects.