Islamic debt sales slump as Gulf’s oil wealth ebbs

Bloomberg

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Islamic bond sales may fall for a second straight year after hitting a record $30.8 billion in 2007 as tumbling oil prices sap demand from their target market, oil-rich Middle East Muslims.

The 2008 credit crunch hit Islamic bonds, or sukuk, harder than other debt as oil fell 54 percent. CIMB Group, the largest underwriter of Islamic bonds in 2008, predicts a decline in sukuk sales this year, following last year’s 56 percent drop.

Indonesia planned its first global sukuk sale in October but delayed it twice. "It was impossible, given the market situation," said Dahlan Siamat, the Indonesian Finance Ministry official in charge of selling bonds that comply with Islamic laws against interest payments. The ministry plans to try again next month "if the market recovers and there is demand," he said.

Corporate and government sales of sukuk, which comply with Shariah law by using asset returns to pay investors instead of interest, slumped to $13.6 billion in 2008, Bloomberg data show. International bonds and emerging-market debt dropped 5 percent and 15 percent.

Even as the Monetary Authority of Singapore, the city-state’s central bank, announced a new sukuk program this week, sales may fall again this year to $13 billion, said Badlisyah Abdul Ghani, chief executive officer of CIMB Islamic, a unit of CIMB Group.

Singapore’s announcement doesn’t signal "an immediate resurgence in the sukuk market," Badlisyah said. "It is a sign the market is still active."

Holding back
The Japan Bank for International Cooperation, a government agency, is holding back on its planned Islamic bond sale. The bank said in 2007 it would sell between $200 million and $300 million worth of Islamic bonds in Malaysia. None has been sold. The credit crisis made it "much more difficult" to attract investors, said Toru Aguin, a bank spokesman in Tokyo.

Thailand hasn’t set a date for its pending sale of similar debt in Malaysia, the United Arab Emirates and Saudi Arabia.

Selling Islamic debt remains a Thai government priority but is difficult "at the moment," said Pongpanu Svetarundra, director general of the Finance Ministry’s Public Debt Management Office.

Indonesia’s bond issue would come four years after the last dollar-denominated sukuk sale from an Asian government, Pakistan’s $600 million offering in January 2005.

"Investors prefer to hold cash right now," said Rahmat Waluyanto, director-general of Indonesia’s debt management office and Siamat’s supervisor.

Corporate issuers are stalling, too: Deyaar Development PJSC, a Dubai real estate company, has delayed its planned sukuk sale, Chief Executive Officer Markus Giebel said. Last year, companies from Malaysia and the U.A.E. accounted for more than 70 percent of such bond sales, according to Standard & Poor’s.

Aldar Properties PJSC, Abu Dhabi’s biggest developer, sold 3.75 billion dirhams ($1 billion) worth of sukuk in June.

The average extra yield on corporate and government sukuk above the London interbank offered rate, or Libor, is now 11.1 percentage points, up from 1.9 percentage points a year ago, according to HSBC-DIFX indices. That spread widened to a record 11.9 percentage points in December, compared with 6.97 percentage points for non-Islamic bonds in the Middle East.

Rapid fall in demand
Haissam Arabi, an investment committee member at Shuaa Asset Management, a unit of Shuaa Capital, said the response to a sukuk sale now would be underwhelming. "If anybody in Asia comes out with a bond today, don’t expect the Saudis or anyone else to bite," Arabi said.

Mohamed Damak, a Paris-based S&P credit analyst, said in a Jan. 14 report that the sukuk market won’t recover until the second half of 2009 or early 2010 after a "dreadful" 2008.

Economic growth in the Middle East will slow to 5.3 percent this year from an estimated 6.1 percent in 2008, the International Monetary Fund said in November. Saudi Arabia’s government, which gets 90 percent of its income from oil, is forecasting its first budget deficit in seven years.

"Liquidity in the Middle East is down," said Philipp Lotter, a senior vice president at Moody’s Investors Service in Dubai. "The global markets need to recover before the sukuk market can unfold itself to its full potential."Growth is slowing around the world after $1 trillion in losses and writedowns at the biggest financial institutions caused credit markets to seize up and sent the global economy into a recession.