“Africa rising”: Sukuk appetite spreads
A new frontier seems to be opening for the global sukuk market.
With conventional investors appetite for African bonds waning, governments in the region are looking at the Sukuk market to diversify their funding base and finance the big infrastructure projects.
South Africa recently announced plans to issue its first sukuk, aiming to become only the second non-Muslim country sukuk issuance after the United Kingdom. The move comes as governments are facing an increasingly challenging debt markets.
Once the US Federal Reserve announced that it would start tapering it’s quantitative easing programme in May 2013, it didn’t take long for the market jitters to spread to emerging economies. Bond prices dropped, with investors seeking greater yields and more stable environments. The sukuk market was not immune to this, with issuance declining by 12 percent to $120 billion in 2013 (Fitch). But Islamic finance continues to generate significant interest in the region, as sovereigns, including Nigeria, Kenya and Senegal, look to tap into alternative sources of funding.
Africa rising. Can confirm 2 West African soverigns have mandated a multi-lateral to advise on debut sukuk. More later. #MPsukuknews— MushtakParker (@mushtakparker) August 30, 2014
On the downside, the weak investment climate remains a concern as noted recently by the ratings agency Moody’s:
Moody’s, which assigned rating (P)Baa1 to South Africa’s sukuk issuance, notes:
The proceeds of the sukuk certificates will be used by the ZAR Sovereign Capital Fund Propriety Limited to purchase interest in a portfolio of properties owned by the Republic of South Africa. Subsequent to the purchase, the Issuer will enter into a lease agreement with the Republic of South Africa ("the Lessee"). Pursuant to the terms of the agreement, the Lessee will periodically pay an amount sufficient to fund distributions payable by the Issuer under sukuk. Upon the dissolution of the transaction, the Republic of South Africa will purchase the lease assets at the exercise price, thus providing the principal amount payable by the Issuer to certificate holders. If the dissolution is triggered by a total loss event and the insurance proceeds are not sufficient to cover the amount payable by the Issuer, the Republic of South Africa will pay an amount equal to the shortfall.
Moody's says South Africa's infrastructure is highly advanced compared with other emerging markets and its institutions, most notably its judiciary, are stronger than those of its peers. Moreover, South Africa offers by far the deepest capital market and the most sophisticated financial system in Africa. While its government debt metrics have deteriorated significantly in the past five years, its debt and debt service remain manageable. In part, this reflects the low share of foreign-currency denominated debt, which provides stability in the context of a volatile exchange rate. Moreover, Moody's expects the government's direct debt to stabilize as a ratio to GDP within the next two years because of spending restraint and revenue buoyancy, despite a slow-growing economy.