MENA SUKUK: Untapped Potential - Adnan Halawi

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My presentation on Sukuk for the MENA SUKUK Congress in Dubai

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MENA SUKUK: Untapped Potential - Adnan Halawi

  1. 1. UNTAPPED POTENTIAL
  2. 2. Sukuk value and volume have consistently grown in the last five years… but plunged in 2013 Global AGGREGATE SUKUK HISTORICAL TREND (1996 - Q3 2013) $ billion # Issues 160 800 713 140 700 531 120 600 552 429 100 500 80 400 257 60 300 231 183 183 40 200 150 115 20 47 2 1 0 40 56 100 49 4 0 0 1996 1997 1998 1999 2000 2001 2002 2003 2004 Amount Issued 2005 2006 2007 Number of Issues 2008 2009 2010 2011 2012 YTD Q3 2013
  3. 3. This collapse was mostly driven by U.S. Fed idea of tapering its stimulus package in May 2013 sending bond yields up around the world, and making it less attractive to issue debt.. YTD (OCT 2013) JPMORGAN GLOBAL AGGREGATE BOND INDEX VS HSBC/NASDAQ DUBAI US DOLLAR SUKUK INDEX 6 September US Jobs data below forecasts 5 16-May: First Hint of tapering by the FED 4 3 2 1 0 1-Jan 16-Jan 31-Jan 15-Feb 2-Mar 17-Mar 1-Apr 16-Apr 1-May 16-May 31-May 15-Jun 30-Jun 15-Jul 30-Jul 14-Aug 29-Aug 13-Sep 28-Sep 13-Oct JPM GABI SKBI
  4. 4. MENA issuance stood at 51% of global in 2006 & was at 23% in 2013… 140,000 60% 133,231 120,000 114,280 51% 51% 50% 100,000 40% 79,180 80,000 30% 60,000 50,368 37,039 40,000 22,561 20,000 19,061 11,421 23% 15% 20,316 8,298 20% 19% 33,790 19,734 8,162 25,106 26,442 10% 7,776 0 0% 2006 2007 2008 Global (Mn$) 2009 2010 MENA (Mn$) 2011 2012 2013 MENA% Sukuk issuance grew from $22bn in 2006 to $133bn in 2012, MENA’s share of total issuance declined over the years..
  5. 5. Outstanding Sukuk globally currently stands at $270bn of which $80 are in MENA! Outstanding Sukuk Market (Bn$) Distribution of Outstanding Sukuk in MENA (Mn$) 40,000 37,648 35,000 80.82 30% 30,000 24,196 25,000 20,000 13,565 15,000 189.93 70% 10,000 4,074 5,000 869 130 130 120 0 MENA Other Saudi Arabia UAE Qatar Bahrain Kuwait Sudan Oman Jordan Mn$ MENA/GCC accounts for 30% of outstanding global Sukuk market Saudi Arabia managed to become the world’s second largest issuer of Sukuk
  6. 6. In 2013, only MENA’s GCC states sold sukuk, Saudi Arabia led, Oman joined… 16,000 30 15,215 14,000 25 24 12,000 20 20 10,000 8,000 15 7,116 13 6,000 10 9 4,000 2,349 5 1,589 2,000 1 130 44 2 0 0 Saudi Arabia UAE Qatar Bahrain Mn$ No of Issues Absence of non-GCC issuers in 2013.. Oman Kuwait
  7. 7. Yet, historically, UAE is still the largest issuer in MENA, followed by Saudi Arabia All-time MENA Sukuk Issuance (Mn$) 60,000 300 279 50,000 49,463 250 46,525 40,000 200 30,000 150 23,792 20,000 100 76 14,413 70 10,000 50 2,984 22 24 251 221 2 UAE Saudi Arabia Qatar Bahrain Kuwait Mn$ No 2 Yemen 0 Sudan 130 120 1 1 Oman Jordan 0
  8. 8. Financial services and real estate top charts after governments.. Oil and gas lag behind MENA Sukuk Issuance by Sector – All to date Mining and Metals Education Conglomerates Leisure and Tourism Telecommunications Food and Beverages Construction Oil and Gas Power and Utilities Transport Real Estate Financial Services Governmental Institutions 0 5,000 10,000 15,000 20,000 25,000 30,000 35,000 40,000 45,000 Mn$ Oil and gas sukuk issuance is not proportional to the size of the sector in the region…
  9. 9. At 48%, MENA international sukuk is well above the world’s average of 15% out of total (2013 figures) 120,000 114,280 60% 100,000 48% 50% 80,000 40% 60,000 30% 40,000 20,000 20% 15% 26,442 17,588 12,750 0 10% 0% Global (Mn$) Total (Mn$) MENA (Mn$) International (Mn$) % of Int'l GCC issuers more often look into international markets while Asian sell more domestically >> domestic sukuk market underdeveloped/underserved in the MENA..
  10. 10. In 2013, MENA Stock Exchanges grabbed 12 listings out of 53 listings globally.. mostly by Nasdaq Dubai.. Irish SE grabbed most globally 12,000 16 15 14 10,000 12 8,000 10 9 6,000 4,000 8 8 6 5 4 2,000 2 0 0 Mn$ No Most of the Sukuk listed on Nasdaq Dubai are by UAE issuers, will the trend change with IDB, and other issuers listing on Nasdaq Dubai
  11. 11. Most of the listed MNEA issuers list on international stock exchanges such as ISE & LSE, but Nasdaq Dubai managed to attract some… (2013 figures) 9,000 8,000 14 12 12 7,000 10 6,000 9 5,000 8 4,000 6 3,000 4 2,000 3 2 2 1 1,000 1 1 1 0 0 Irish SE Nasdaq Dubai London SE Saudi SE Mn$ Bursa Malaysia No Dubai FM Bahrain SE Muscat SM
  12. 12. The Saudi Model From a dormant issuer to a key player in the market – GACA set the pace Second largest issuer of sukuk in 2013 worldwide n after Malaysia! Diversity in issuers profiles: banks, oil & gas, real estate and construction, agriculture and food.. Mostly domestic and in SAR, yet some international sukuk Way to go in terms of liquidity and trading
  13. 13. The UAE Model • UAE maintained a spot among world’s top issuers despite the credit crunch and global financial crisis • Mostly skewed towards financial services (banks) – followed by real estate, power and oil & gas • Quasi-sovereign but not federal or sovereign or government sukuk! >> area to develop • Private-sector credit growth in the UAE is expected to accelerate between 2014 and 2020
  14. 14. DUBAI – THE HUB • HH Sheikh Mohammed’s initiatives to give big push to the Sukuk market: more issuance, better regulatory framework, more facilities, encourage listing and boost trading! • Dubai Expo 2020 is expected to leave a positive impact • Innovative structures • DFM and Nasdaq Dubai initiatives supportive
  15. 15. The Omani/Kuwaiti Models KUWAIT – Defaults Hurt Kuwaiti companies started well, witnessed few defaults and now rarely sell sukuk We have not seen any new initiatives from the regulators OMAN – Cautious Approach Started by regulating the industry First corporate sukuk in 2013 Oman sovereign sukuk anticipated
  16. 16. The Qatari Model In March 2013, central bank began quarterly issues of riyal-denominated government bonds and sukuk, with maturities of three and five years In June 2013, Qatar started trading government bonds & sukuk – a step expected to deepen debt market Maintaining a spot with huge issuances from either the government or the private sector once a year QSE announced few initiatives, any follow up? Will World Cup 2022 drive growth?
  17. 17. The Bahrain Model  One of the oldest issuers in the region and the world  Constantly selling the Short-term Ijara Sukuk and Al Salam sukuk (24+ issues a year)  Occasionally selling 6-months or 12-months paper  Corporate issuance declined  In December, the central bank formally combined existing rules for issuing and listing financial securities, including sukuk, in an effort to make the process more efficient The incorporation of an issuing agent or special purpose vehicle for sukuk will not take more than 48 hours from the time offering documents are approved, whether for local or for international sukuk issuance
  18. 18. Other MENA countries’ baby steps… Morocco: The government adopted in January 2014 a bill regulating Islamic banks and sukuk, law yet to be approved Egypt: Egypt's financial regulator is expected to submit new rules to the government in 2014 to facilitate issuance of sukuk as part of a capital market law – political hurdles preventing development Tunisia: huge potential – untapped potential
  19. 19. If current trends continue, demand-supply gap for sukuk will taper of by 2018 to reach $187 billion SUKUK DEMAND & SUPPLY LEVELS (2013 - 2016) $ bln 1000 900 Supply & Demand Gap: Despite the huge sukuk issuance growth in 2012, the market was still undersupplied. However, despite the plunge in 2013, sukuk market growth rates are expected to return to a steady growth 800 700 600 500 400 300 200 100 0 2008 2009 2010 Total Global Sukuk Matured 2011 2012 Total Global Sukuk Issued 2013 2014 2015 Total Outstanding Global Sukuk 2016 2017 Total Sukuk Demand 2018
  20. 20. Many emerging and frontier markets are paving the way for sukuk market development by first establishing suitable regulations… Which of the following emerging markets is the most attractive for sukuk investment/issuance? 4.07 Oman 4.46 3.19 Morocco 3.42 3.17 Azerbaijan 2.88 2.91 Libya 3.00 2.84 Tunisia 3.31 2.76 Egypt 3.00 2.22 Nigeria 2.89 0.00 0.50 1.00 1.50 2.00 BUY SIDE - Preference 2.50 3.00 SELL SIDE - Expectation 3.50 4.00 4.50 5.00
  21. 21. Lead arrangers and issuers believe the main reason for issuing sukuk is to diversify their sources of funding as investors mostly invest in sukuk due to Shariah requirements BUY SIDE: what is your primary reason for investing in sukuk? Yield SELL SIDE: What is your most common reason for sukuk issuance? 14.3% Diversify source of funding Diversification 44.4% Business Expansion 20.6% 22.2% Cheaper funding and better pricing Refinancing Opportunistic Religious mandate to only invest in Islamic instruments 14.8% 14.8% 11.1% 54.0% Restructuring 3.7% 0.0%10.0% 20.0% 30.0% 40.0% 50.0% 60.0% 0% 10% 20% 30% 40% 50%
  22. 22. Lead arrangers and investors agree that global market interest rates are the most important factor affecting sukuk pricing The most important factors based on their significance to sukuk pricing 4.0 Global market interest rates 4.1 3.2 Sukuk rating 3.7 3.0 Type of issuer 3.1 2.9 Type of currency 2.4 2.8 Investor business structure/diversity 2.3 2.8 Type of sukuk - asset-based or asset-backed 2.7 2.8 Purpose of sukuk issuance 2.7 2.6 Type of market (international or domestic) 3.1 2.6 Size of sukuk 2.7 0.0 0.5 1.0 BUY SIDE 1.5 SELL SIDE 2.0 2.5 3.0 3.5 4.0 4.5
  23. 23. While liquidity and tradability are still considered the main issues causing the price gap between sukuk and bonds SELL SIDE: What drives the price gap between sukuk and bond? Liquidity & Tradability 69.6% Sharia non compliance risk 13.0% Sukuk structure 8.7% Sukuk paper scarcity 8.7% 0.0% 10.0% 20.0% 30.0% 40.0% 50.0% 60.0% 70.0% 80.0%
  24. 24. Things to watch • Are we going to see more synergy between SEA and GCC standards? • More cross-border sukuk? Will non-MENA issuers tap MENA markets? • Malaysian or Turkish issuers list on Nasdaq Dubai? • Oman to emerge as new hub? • Will Egypt, Libya, Morocco, Tunisia and other states join the club anytime soon? • Will Dubai initiatives work out?
  25. 25. Things to watch • How will Expo 2020 and FIFA 2022 affect the market? • How will QE2 affect sukuk issuance in the region? • Are we going to see retail Sukuk anytime soon in the MENA?

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