RAM Rating Services Berhad ("RAM Ratings") opines that the geopolitical tensions in the Middle East and North Africa ("MENA") region are likely to shift attention to Malaysia's Islamic finance market. Given Malaysia's well-developed Islamic finance market, coupled with the sound legal, regulatory and investor-friendly environment, it is well poised to capture a substantial portion of capital from or originally destined for the Middle East.
RAM Ratings' head of Islamic Ratings, Zakariya Othman, notes that Gulf-based banks and companies are increasingly looking towards Malaysia, the world's biggest sukuk market with a vast pool of investors. To this end, Kuwait-based Gulf Investment Corporation ("GIC") has just issued its maiden ringgit-denominated sukuk equivalent to USD164 million in February 2011 - an inaugural issue under GIC's USD1.1 billion Islamic medium-term note programme.
"There are bound to be more issuers and investors seeking the stability of the Malaysian Islamic market," says Zakariya, who is presenting a paper entitled Sukuk in the Middle East: What revisions need to be made to create a market revival? at the First Annual Middle East Islamic Finance & Investment Conference in Dubai.
Quoting the recent Zawya Sukuk Report as a source, he observes that the continued geopolitical tensions have nonetheless caused potential issuers to postpone their plans to enter the Islamic debt capital market. Moreover, some regulators have also shelved their plans to speed up tax breaks on sukuk.
Zakariya notes that sukuk issuance from the Gulf Cooperation Council ("GCC") countries was poor and below expectations in 1Q 2011. This comes as no surprise as the region has been undergoing multiple revolutions. "Bahrain, traditionally a major issuer of sukuk both on the corporate and sovereign levels, has not had any major deal so far this year, and will probably not see any for some time given its non-conducive landscape," he elaborates.
Apart from the political instability and heightened violence gripping the region, his presentation also raises concerns on the lack of a clear regulatory framework in the GCC debt market, besides the need to enhance the breadth and depth of the debt market with diversified and regulated products. He also highlights that investors' sentiment has been shaken by high-profile events such as the disputes associated with the Investment Dar's USD100 million TID Global Sukuk, as well as the Dubai World debt moratorium. Both cases, he points out, have heightened market uncertainty and raised broader concerns about sukuk structures.
The presentation identified challenges that include the prospective delays in infrastructure projects as well as lack of transparency and concerns on default risks. He stresses that the future of a stable and mature debt market in the GCC region depends much on the implementation of earmarked infrastructure projects. According to the GCC Debt Market Report 2010 by Bayina Advisors, projects valued at about USD2.3 trillion have either been planned or are currently underway in the GCC; these are expected to be completed over the next 5 to 7 years. However, the recent global financial crisis and the MENA region's political unrest have led to project delays in the GCC.
Zakariya, however, concludes that it is still too soon to determine the exact impact of such geopolitical events on the sukuk market. All said, the outlook on the GCC economies remains positive, provided stability can be maintained across global financial markets. Despite political risk in the region, rising oil prices - which are inching towards the record levels of 2008 - are expected to beef up the coffers of oil-rich nations.
-Ends-
Media contact
Chin Jo Sie
(603) 7628 1054
josie@ram.com.my
© Press Release 2011
