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Sovereign Sukuk Returns Beating Company Debt: Islamic Finance

Property prices in Dubai retreated more than 50 percent as the global credit crisis led to a cut in mortgage lending according to estimates from Colliers International. Photographer: Charles Crowell/Bloomberg
Property prices in Dubai retreated more than 50 percent as the global credit crisis led to a cut in mortgage lending according to estimates from Colliers International. Photographer: Charles Crowell/Bloomberg

Aug. 25 (Bloomberg) -- Sovereign Islamic bonds from Asia to the Persian Gulf are beating returns on corporate sukuk for the first time in three months as accelerating economic growth and rising oil revenue shore up state finances.

Government debt that complies with the religion’s ban on interest gained 1.7 percent so far this month, according to the HSBC/NASDAQ Dubai Sovereign US Dollar Sukuk Index, more than the 1.1 percent advance in bonds issued by companies. The last time the sovereign notes performed better was in May, when they dropped 0.5 percent compared with a loss of 2.3 percent on corporate debt.

Malaysia’s Lembaga Tabung Haji fund, France’s BNP Paribas Investment Partners and Duet Mena Ltd. in Dubai forecast government debt will outperform until property prices in the Persian Gulf recover from a slump that prompted credit-ratings companies to downgrade corporate bonds. Average oil prices of $78 a barrel will support fiscal surpluses in the Middle East this year, Moody’s Investors Service said on Aug. 3.

“Investors prefer to hold sovereign debt because they are more comfortable with the ratings and market liquidity,” Hishamuddin Sohaimi, who helps manage about 26 billion ringgit ($8.3 billion) of assets at Kuala Lumpur-based Lembaga Tabung, said in an interview yesterday. “Property prices are unlikely to return to a 2008 peak soon.”

‘Financial Position’

Shariah-compliant government bonds from the Gulf Cooperation Council members and Asia, particularly Malaysia and Indonesia, are likely to benefit the most as growth quickens, said Rafael Martinez Dalmau, director of Islamic investment at BNP Paribas Investment, which oversees $700 billion and is the asset management unit of France’s biggest lender.

The GCC nations are Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates.

The International Monetary Fund said on July 7 that developing economies in Asia will expand 9.2 percent in 2010 and gross domestic product growth in Middle Eastern countries will quicken to 4.5 percent, from 2.4 percent in 2009. Malaysia’s government forecasts growth of as much as 6 percent, while Indonesia is targeting 5.9 percent.

“Higher oil prices certainly improve the financial position of the GCC countries,” Dalmau said in an interview in Singapore yesterday. “The positive view on credit ratings certainly helps. Indonesia and Malaysia continue to improve their fundamentals.”

‘Fiscal Stimulus’

Oil exporters should be able to “maintain a degree of fiscal stimulus,” Tristan Cooper, a sovereign ratings analyst at Moody’s, said in the report this month.

“The economies of oil-exporting countries would only suffer if a steep fall in European economic activity led to a sharp and sustained fall in oil prices,” he wrote.

Property prices in Dubai, the Persian Gulf’s financial hub, retreated more than 50 percent as the global credit crisis led to a cut in mortgage lending and caused companies to slow expansion, according to estimates from Colliers International.

“The sovereigns are better quality, they are larger in size and they are more liquid,” Rabih Sultani, a fund manager at Duet Mena, a unit of London-based Duet Group that oversees $2.1 billion, said in an Aug. 19 interview. “The spectrum is quite wide when you come to the corporate side but corporate issuers were distressed.”

Record-Low Yields

The Dubai Department of Finance’s 6.396 percent Islamic bond returned 1.4 percent so far in August compared with a 0.8 percent gain on the 6.25 percent dollar-denominated sukuk sold by DP World Ltd., according to data compiled by Bloomberg.

Malaysia’s 3.928 percent government Islamic note returned 1.5 percent, compared with a 1.2 percent increase for the sukuk sold by state-owned oil and gas producer Petroliam Nasional Bhd., according to prices from Royal Bank of Scotland Group Plc. Islamic bonds sold by Indonesia gave investors a 2.7 percent return.

Shariah-compliant bonds, which are based on the exchange of asset flows rather than interest to comply with the religion’s principles, returned 10.3 percent this year, according to the HSBC/NASDAQ Dubai US Dollar Sukuk Index. Debt in developing markets gained 13.4 percent, according to JPMorgan Chase & Co.’s EMBI Global Diversified Index.

The gap between the average yield for emerging-market sukuk and the London interbank offered rate has narrowed 62 basis points, or 0.62 percentage point, to 381 since the end of June, according to the HSBC/NASDAQ Dubai Sukuk Average Spread.

The yield on Malaysia’s Islamic note dropped to a record-low of 2.63 percent today and is down 30 basis points so far this month, RBS prices show. The yield on Indonesia’s 2014 sukuk reached an all-time low of 2.543 percent on Aug. 19.

Global Sales

Global sales of sukuk fell about 16 percent to $9.8 billion so far this year, according to data compiled by Bloomberg. Issuance totaled $20.2 billion last year, up from $14.1 billion in 2008. It reached a record $31 billion in 2007.

Sales will pick up in the second half of the year and rise above the total in 2009, as more companies and governments tap the market, Badlisyah Abdul Ghani, the head of the Islamic banking unit at CIMB Group Holdings Bhd., the biggest underwriter of sukuk this year, told reporters in Kuala Lumpur yesterday. Issuance will climb to as much as $25 billion, he said.

“The GCC, Malaysia and Indonesia continue to make great strides in improving and diversifying their economies,” Dalmau of BNP Paribas said.

To contact the reporter on this story: Khalid Qayum in Singapore at; David Yong in Singapore at

To contact the editor responsible for this story: Sandy Hendry at

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