AAA Guarantee Gives 1st Tunisia Sukuk Pricing Power: Arab Credit

The backing of an AAA rated Islamic bank is a boon to the debut sukuk Tunisia plans by July.

The North African nation, which triggered the so-called Arab Spring uprisings in 2011, is planning to sell more than $100 million of Shariah-compliant bonds guaranteed by the Islamic Development Bank, a top-rated lender owned by Muslim countries, Finance Minister Hakim Ben Hammouda said in a May 2 interview in the capital, Tunis. That will help keep borrowing costs lower than they would be otherwise, said Mourad El Hattab at STB Bank.

“The guarantor has great importance,” El Hattab, head of research at STB in Tunis, said by phone yesterday. “It will help keep the interest within the current range.”

The government, which is struggling to curb a 15 percent unemployment rate, relies on foreign aid to pay for salaries, imports and subsidies on fuel and food amid shrinking tourism revenue and investment. The IDB has provided Tunisia $3.6 billion in support and, in unrelated transactions, has issued at least six sukuk totaling $5.4 billion for other borrowers since 2009, according to the bank’s website.

The yield on Tunisia’s 400 million-euro ($557 million) bonds maturing in 2020 fell three basis points to 4.42 percent at 11.59: a.m. today in Dubai, compared with a high for the year of 5.7 percent on Jan. 6. The JPMorgan Chase & Co. dollar-based index for Middle Eastern sovereign bonds yielded 4.31 percent yesterday, down from a high this year of 4.74 percent on Jan. 8.

‘Surplus Liquidity’

“For sukuk buyers, the determining influence is not the real economy, it’s the surplus liquidity in the Gulf region and the appetite for sukuk at the regional level,” Florence Eid, chief executive officer of Arabia Monitor, a London-based research firm, said in a phone interview yesterday. “The IDB guarantee will give it a floor and support.”

Officials at the IDB’s headquarters in Jeddah, Saudi Arabia, weren’t immediately available when phoned several times yesterday for comment.

Fitch Ratings on April 25 affirmed Tunisia’s senior unsecured foreign bond at a speculative BB- grade, citing continued political risk, bigger budget and trade deficits and increased debt.

“This is a higher level than BB- rated peers, and Fitch expects it to exceed 50 percent of GDP by end-2015,” the credit-rating company said.

Doubling Needs

Tunisia’s budget shortfall grew to 6.5 percent of gross domestic product last year from 4.5 percent in 2012, according to Fitch, and Prime Minister Mehdi Jomaa has said external borrowing needs will reach $8 billion, about double the government’s initial estimates.

“If it has a full guarantee, the sukuk will price against the rating of the guarantor, rather than Tunisia’s own risk profile,” HSBC Middle East Chief Economist Simon Williams said yesterday by phone from Dubai.

The country is benefiting from more than $3 billion in international credits and loan guarantees designed to help its transition to democracy. The International Monetary Fund agreed April 25 to disburse $225 million to Tunisia, bringing total payments from the Washington-based institution to $888 million since last year. The IMF agreed in 2013 to provide $1.78 billion in aid, the World Bank pledged $1.2 billion in 2014 and Japan has guaranteed $250 million of loans.

Neighboring Algeria said May 4 it would provide a $50 million grant, $100 million loan and $100 million deposit in the Tunisian central bank, according to state-news agency Tunis Afrique Presse.

The government will not repudiate as illegitimate the external public debt amassed under ousted former president Zine El Abidine Ben Ali, Fitch said. “Tunisia benefits from strong support from international financial institutions and bilateral creditors,” it said.

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