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Friday, February 20, 2009

DIFC chief economist urges Gulf gov'ts on sukuks

by Soren Billing

There has never been a better time for Gulf governments to start issuing Islamic bonds (sukuks), despite existing issues trading at “outlandish” prices, the chief economist of Dubai International Financial Centre (DIFC) has said.

“This is the time for governments to start introducing sukuks as part of public finance,” Dr Nasser Saidi told reporters at a press conference.

By using sukuks to finance major projects such as power plants, roads and ports, GCC governments would help the region consolidate its position as an international centre for Islamic .

“This is the time at which governments should be active with their central banks to create money markets in Shariah compliant instruments that the central banks can then use for assisting and providing liquidity to Shariah compliant institutions,” he said.

By simply running down the surpluses accumulated during the six year oil boom governments would risk losing investments that could continue to earn them an income, he noted.

Dr Saidi estimated the total size of that surplus to be around $950 billion.

"As governments develop the debt market, it will encourage the private sector to start issuing debt again," Dr Saidi said.

Asked about the low price of Gulf sukuks in the secondary market, he said prices are likely to return to more reasonable levels within the near future.

“I think this is a temporary phenomenon. I think the pricing is unrelated to the fundamentals,” he said.

“It doesn’t make a great deal of sense to me that you are pricing UAE debt as being more risky than Iceland…. This current pricing is outlandish.”

The amount raised globally from sukuk issuance decreased by 54.5 percent in 2008 from the year before to $15.1 billion, while the number of issues rose to 165 from 129, Global Investment House said in a research note on Thursday.

“The decline in sukuk issuance is due to the credit crunch that forced investors to step aside from the fixed income market, including the Islamic one,” the investment bank said.

“As evident of the credit crunch effect on sukuks, issuances in the fourth quarter of 2008 were weak when compared with other quarters in the same year.”

In the first three quarters of last year, the amount raised from sukuks averaged $4.8 billion per quarter, compared with only $0.8 billion in the fourth quarter.

GCC countries and Malaysia continued to be the largest markets, accounting for 55.5 percent and 36.3 percent respectively of the dollar amount issued.

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