Turkey sukuk set to test Gulf appetite to diversify

DUBAI - Reuters

National Bank of Abu Dhabi branch office in Abu Dhabi. Gulf investors could leave their comfort zone within the region and look to Turkey.

Turkey’s first-ever issue of a sovereign sukuk will test Gulf investors’ willingness to leave their comfort zone within the region and settle for lower yields outside it - potentially signalling fresh flows of Gulf money into southeast Asian
and African debt.

Turkey, rated BB by Standard & Poor’s, held investor meetings for the dollar-denominated Islamic bond in several Gulf cities this week. The issue, which could raise up to $1 billion, is expected during the week starting on Sept. 17.

Traditionally, Gulf investors have tended to focus on their own region, where credit ratings tend to be high but geopolitical risks keep yields higher than would normally be the case for such ratings.
“Gulf investors tend to be comfortable with their regional geopolitical risk, which maintains yields above assets of other similarly rated EM (emerging markets) issuers,” said Doug Bitcon, head of fixed income funds and portfolios at Rasmala Investment Bank in Dubai. “There is therefore less incentive to look elsewhere when investing.”

Gulf investors

When Poland issued a $2 billion, 10-year conventional bond this week, Middle Eastern investors showed little interest, taking just 4 percent of the debt on offer.

But the Turkish sukuk is likely to attract much stronger demand from the Gulf. One of its selling points will be the sukuk format; unsatisfied demand for sukuk from cash-rich Islamic investors in the Gulf has been massive this year. Ernst & Young estimates global outstanding demand for sukuk totals about $300 billion, while new issuance this year may not be much over $100 billion.

Also, as Gulf investors grow in size and experience, analysts detect an increasing desire among them to expand their debt portfolios into other regions - even if that means accepting somewhat lower returns.

Portfolio diversification

“Gulf investors showed very strong interest in the recent eurobonds issued by Turkish banks (over the last several weeks), and this appetite should continue to the sovereign,” said Apostolos Bantis, fixed income analyst at Commerzbank in London.

Bitcon said: “Following events in recent years, there is greater acceptance of the merits of portfolio diversification, which can have an opportunity cost.

“There is a clear supply/demand imbalance in the sukuk market and this new Turkey issue will therefore, in our view, be on the radar of most Gulf investors.”