DUBAI — The global market for Islamic bonds, or sukuk, returned to growth last year, shaking off the lingering effects of the global financial crisis, analysts say, with total issuance beating even the pre-crisis year of 2007 and Gulf issuers playing an increasingly important role.
Sukuk issues reached a record $51.2 billion in 2010, an increase from the 2007 peak of 34 percent, according to a report by Standard and Poor’s.
It is too soon to say what effect the turmoil in Bahrain and elsewhere may have on the market, analysts said. But by mid-February, more than $16 billion worth had already been issued worldwide since the start of the year. High-profile issues from the Gulf region included a 3.5 billion dirham, or $953 million, sukuk from Aldar Properties in Abu Dhabi, issued on Feb. 28 and maturing in December 2013.
“What the market has done in 2009-2010 is grow back to the 2007 level of issuances,” said Paul-Henri Pruvost, an analyst covering Central Europe, the Middle East and Africa at S.&P. “Malaysia remains the real driver of the sukuk market, but compared to Southeast Asia, there are other large sukuk markets, such as Saudi Arabia, Qatar and the United Arab Emirates, that have strong economic needs and are still creditworthy.”
After two turbulent years, the market started making a strong comeback at the end of 2010. While Malaysia continues to dominate the sukuk market, accounting for 78 percent, or $39.8 billion, of total issuances in 2010, activity is picking up in the Gulf. The value of Islamic bonds issued in the Gulf alone jumped 61 percent in the past year, with issuances valuing $7 billion in 2009-2010, compared to $4.3 billion the previous year, according to research by the international commercial law firm Trowers & Hamlins.
The Gulf region is expected to play a larger and more sustainable role in the sukuk market in the future, according to research by S.&P., in the expectation of a gradual recovery in economic activities and the region’s need to finance the huge pipeline of government projects and infrastructure for events planned for the coming years, like the 2022 World Cup in Qatar.
A general improvement in debt markets has contributed to the rise in sukuk activity. The value of conventional bonds issued in the Gulf hit $15 billion in 2009-2010, up from $12.9 billion the year before, an increase of 16.3 percent, Trowers & Hamlins said. The uprisings in the Arab world may have dampened prospects for debt issuances in general in the short term, but analysts say they remain optimistic about long-term opportunities.
“The issuance of fixed-income instruments in the G.C.C. and Asia, whether sukuk or conventional bonds, would probably not find the ideal reception for a launch right now,” said Eric Swats, head of asset management at Rasmala Investment Bank in Dubai, referring to countries in the Gulf Cooperation Council. “And of course, because of the uprisings, there probably haven’t been as many issuances as there could have been.”
Still, there has been a marked effort by regional governments to develop the sukuk market in the Gulf. The central bank of Bahrain has been issuing modest-size sukuk on a regular basis as part of a policy begun in 2005 to provide domestic Islamic financial institutions with funds.
Similarly, the central bank of Qatar announced plans in early February to close Islamic banking sections within conventional banks to push business toward the country’s purely Islamic lenders. After that announcement, Qatar International Islamic Bank confirmed plans to issue sukuk this year.
“There has been a general increase in debt markets in the region,” said Khalid Howladar, senior credit officer at Moody’s Investor Services in Dubai. “However, contagion and political risks may have pushed up the risk perception that may stall full recovery for awhile.”
In the past two months, ratings agencies have downgraded sovereign ratings for Bahrain, Tunisia, Egypt and Jordan in response to the economic uncertainties stemming from political risks.
This may have lowered appetite for sukuk introductions and made issuance more costly by raising premiums, but analysts said the effects on the general sukuk market appeared to have been limited.
The downgrade of Bahrain’s sovereign rating is likely to raise the risk premium on issues from the central bank of Bahrain, said Mr. Pruvost, of S.&P. But “given the small amounts issued in relation to the government’s liabilities, such a trend should not have a major impact on the kingdom’s finances,” he said.
“As for other negative rating actions on Tunisia, Egypt and Jordan, these are not countries that were as active in the sukuk market,” he continued. “For the time being, it is affecting countries which are not market makers in the sukuk markets, like Saudi Arabia, Qatar and Malaysia.”
There are still kinks to be worked out in the industry — from standardizing compliance with Shariah law to encouraging the private sector to become more involved. One of the main reasons behind the push to build a stronger sukuk market in the region is to develop a more solid fund-raising market for Islamic banks and insurance companies. These companies are typically constrained in terms of the asset classes they can invest in, so making more sukuk available to them eases their treasury financing challenge.
“These institutions in the Gulf and Asia are trying to make their balance sheets very liquid,” Mr. Pruvost said, “so they are very hungry for this kind of instrument.”