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How should the Islamic finance Industry tackle the new entrant: Headline Risks

By Mohammed KHNIFER | February 20, 2019

 How should the Islamic finance Industry tackle the new entrant: Headline Risks

Sukuk and conventional financing share the same features that could make them vulnerable to global factors. One thing to note is that international investors should consider economic fundamentals over the headline risks that spur from the Middle East. In Middle East, active portfolio managers, who are on the ground and manage sukuk portfolios, would tend to benefit more than the passive ones (this is due to the fact most new investors to our region can be easily moved by negative sentiments and geopolitical risk). And when that happens, we can see “smart money” coming in and picking up certain GCC Sukuk at great value. Indeed, Islamic finance investors should value fundamentals over the headline risks.

Such “great values” can also been seen in the primary market too. Let us take a brief case study on the above. In early January 2019, Saudi Arabia surprised the Emerging market with a bond sale of more than $7 Billion (with premium of 20 to 30 bps over the 10 years tranche). Despite the negative media coverage in the early hours of the issuance and the pressure that was put on investors, Saudi Arabia lured in a whopping $27.5 billion in orders. Then the media questioned the type of investors and only to find out that foreign investors bought almost 97% of the issuance. Indeed, the sheer number of foreign investors speaks volumes about the strong economic fundamentals of the issuer who closed the trade in less than 7 hours (Potential market record in EM).

-Geographical distribution Tranche 1 (bond due in 2029):

 US 40% UK 26% Asia 18% Europe 13% Middle East 3%

-Geographical distribution Tranche 2 (the note due in 2050):

 US 45% UK 23% Asia 17% Europe 13% Middle East 2%

2018 Overview

Bond and sukuk issuance in the six-nation Gulf Cooperation Council (GCC) totalled $77 billion as of Dec. 10,2018 down from $85 billion in the prior-year period, according to data from Emirates NBD. Some GCC securities (worth nearly $340b) would benefited from the gradual inclusion by end of Jan.2019 to JP Morgan Emerging Market Bond Index. The Middle East’s share of global emerging markets issuance climbed from 12.5% to 14.8% by end of 2018.


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