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| 24 April, 2018

Sharjah turns to the debt market to raise investment capital

Responsibility of running the book for the issue was spread across local, regional and global lenders

View east across Khalid Lagoon to the corniche, Sharjah, UAE

View east across Khalid Lagoon to the corniche, Sharjah, UAE

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The government of Sharjah is tapping the debt markets to help fund large-scale infrastructure and economic development programmes, issuing its largest transaction to date.

On March 8 the emirate closed the book on a dollar-denominated sukuk (Islamic bond) valued at $1bn.

The 10-year bond, the emirate’s first sovereign sharia-compliant offering this year, was listed on the NASDAQ Dubai with an initial price guidance of 150 basis points over the 10-year mid-swap rate, though this subsequently tightened to 135 basis points. Demand was high and the bond was oversubscribed, at around $2.4bn.

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Waleed Al Sayegh, director-general of the Sharjah Finance Department, attributed the strong appetite to strength and stability in the economy. “We were confident that the sukuk issuance would be successful due to the emirate’s economic and financial status on a regional and global level,” Al Sayegh told local media.

Responsibility of running the book for the issue was spread across local, regional and global lenders, including the Sharjah Islamic Bank (SIB), Dubai Islamic Bank, HSBC and Standard Chartered.

The bond is the third in a series of successful sukuk floated by the emirate on the NASDAQ Dubai in recent years. The first, in 2014, was issued soon after it was assigned a sovereign credit rating by both Moody’s and S&P. Valued at Dh2.8bn ($762.2m), the bond was heavily oversubscribed, attracting bids of some Dh29bn ($8bn). Demand for the second, in January 2016, was slightly more muted, due to market uncertainty resulting from falling energy prices, although the five-year-Dh1.8bn ($490m) bond still attracted $950m in offers.

Sharjah enters Panda market

In early February the emirate also became the first Gulf sovereign issuer to tap the Chinese interbank bond market, issuing a RMB2bn ($318.4m) Panda bond.

China is looking to attract bonds from foreign issuers to encourage use of the renminbi worldwide and diversify funding for its Belt and Road Initiative, and several governments and companies in the Gulf region are considering entering the Panda market, according to international media reports.

Bonds to help fund investment programmes

Capital raised by the latest debt issuance will help support the government’s ongoing efforts to stimulate economic growth through investment. 

A large portion of the 2018 budget has been dedicated to developing key sectors of the economy, including tourism, health care and manufacturing. It foresees a 6% increase in spending this year, with total outlays of Dh22.1bn ($6bn). Of this, 24% has been committed to infrastructure projects, a 3% increase on the previous year.

As both government-backed agencies and the private sector are boosting investment in real estate development, demand for infrastructure to serve these projects is on the rise, with priority given to the rollout of transport and utilities projects.

The expectation of a faster flow of infrastructure projects through the development pipeline was also a factor in SIB issuing a Dh266.8m ($72.6m) convertible sukuk at the beginning of January.

The resulting increase in liquidity will allow the bank to raise its profile in the financing of infrastructure developments and become more active in the construction, manufacturing and trade sectors, Ahmed Saad, deputy CEO of SIB, told local media in March.

“SIB will continue to be the main bank for the government of Sharjah and we are looking to participate in most of the mega infrastructure projects in the emirate,” he said.

GDP growth forecast to hit 2.5%

The increased investment in economic capacity, funded in part by the capital generated through the bond issuances, is expected to boost GDP growth, with ratings agency S&P anticipating growth of 2.5% per year by 2020.

In a report issued in mid-January S&P said accelerating activity in the real estate and construction sectors coupled with high degree of economic diversity would underpin growth.

© Oxford Business Group 2018