JEDDAH: After a period of considerable turmoil in the regional bond and Sukuk markets in connection with the global economic turmoil, the fundamentals for Sukuk issuance are once again becoming more favorable. Speaking at the Bonds & Loans Middle East conference in Dubai recently, chief economist Jarmo Kotilaine of the National Commercial Bank stressed the growing recognition of the important role that Sukuk can play in fostering economic development in Saudi Arabia. Although important progress has been made in Sukuk issuance, the active names have tended to be large companies – led by SABIC and Saudi Electricity – as cost considerations and illiquid secondary markets have deterred others. Nonetheless, Sukuk are exceptionally well positioned, serving as a bridge between the large pools of capital in the Kingdom and the massive infrastructure investment requirements, which are variously put at some $750 billion or more. The government has made an important step by indicating that Sukuk would be used to finance the new King Abdul Aziz Airport project in Jeddah and the pending mortgage law will likely create additional public sector issuance opportunities, thereby helping to create quasi-sovereign benchmarks to encourage others to come to the market. This is a process that has successfully played out in some of the other regional economies, such as Bahrain, Qatar, and the UAE. In spite of the improving outlook for Sukuk, there is an acute need for developing structures and solutions that will enable Sukuk to become a more integral part of the regional financial sector, Kotilaine said. While bond markets are an equal third pillar – along with banking and equities – of developed financial markets, their role remains marginal in Saudi Arabia, he added. Above all, innovation is needed to enable the use of Sukuk in project finance. At the same time, tenors will have to increase beyond the current norm of five years, although some positive progress has indeed happened in this regard of late. But the markets will also need new investors, most notably in the institutional space, which is the backbone of global bond markets. In this area, positive progress is materializing thanks to the growth of the Saudi insurance sector. Plans have also been mooted of giving foreign institutions access to the Sukuk market. Retail investors are increasingly able to tap the Sukuk market both directly and through a growing number of Sukuk and money market funds. The positive market dynamic, along with recent initiatives by market participants, should also foster greater standardization which will hopefully reduce the time and financial costs associated with Sukuk issuance and increase market efficiency. Kotilaine noted that "greater attention is being paid to Malaysia's success in the Sukuk space, partly because of growing issuance by GCC names there. Rising to this challenge by developing a regional Sukuk market is essential for unleashing the potential of the GCC as an important center of Shariah-compliant finance globally."
