Recent months have seen encouraging innovation in the market due to new tenors and innovative structures, such as the first-ever true project sukuk by Saudi Aramco Total Refining and Petrochemical Company (SATORP). But in truth the Saudi and GCC sukuk markets have not yet matched the performance of Malaysia which routinely accounts for up to two-thirds of global issuance while having only one-fifth of the GCC’s GDP (gross domestic product). A large part of the difference seems to be linked to the important role of government-linked institutions as sukuk issuers in Malaysia.
Signs are now emerging of potentially transformative changes in the GCC sukuk markets. Yields have dropped and overall issuance levels picked up after greater consensus about acceptable structures and procedures for default-type situations. Beyond Bahrain, regional sovereigns, such as Qatar, Dubai, and Ras Al-Khaimah have issued sukuk, along with government-owned corporations and multilateral organizations such as the Islamic Development Bank. Last week saw indications that Saudi Arabia might be about to enter the sovereign sukuk market, although the actual issuance may be done through a fund or a government agency, possibly as soon as Q1 of 2012. The large budget surpluses create little foreseeable need for external financing and the Kingdom has until recently prioritized efforts to pay down its public debt to less than 10 percent of GDP, a goal that has now been accomplished.
The latest indications followed a statement by the minister of finance in October that Saudi Arabia was exploring the possibility of bond/sukuk issuance to fund elements of its large infrastructure pipeline. Airports were mention as a particular opportunity given their revenue generating potential. The implementation of the mortgage law would create another source of quasi-sovereign sukuk, mirroring the successful experience of the Cagamas Berhad National Mortgage Corporation in Malaysia.
Saudi (quasi-)sovereign sukuk issuance would offer compelling benefits. The establishment of a sovereign benchmark would stimulate other issuers by making it easier to price offerings. This would help stimulate the development of the capital markets as a genuine alternative to bank finance, something that would reduce the cyclicality of access to funding. It would also boost funding for long-term investments needs, something that banks have historically struggled to do because of their short-term deposit base.
Sovereign sukuk issuance would be welcomed by institutional investors and banks which are clamoring for new high-quality, long-term investment vehicles of the kind that constitute the backbone of the portfolios of their peers globally. Saudi sovereign issuances would be highly desirable even by global standard. Also individual investors are drawn to sukuk which tend to combine capital protection with reasonably predictable returns and a growing number of funds are improving investor access. Moreover, the infrastructure story is one of the most compelling investment opportunities in the region and sukuk would be an obvious means to mobilize private capital for financing it. Sovereign sukuk would further increase the effectiveness of liquidity management in the economy, potentially a challenge in a fixed exchange rate environment.
Sukuk issuance would also enable the government to better manage its expenditure commitments. With the global economic environment still uncertain and potentially volatile, exploring new financing options makes sense. Even in the absence of actual necessity, diversifying funding sources would support the government’s long-standing strategic commitment to empowering the private sector. This would allow the government to focus its budgetary expenditure more directly on priority areas.
