The Islamic Development Bank (IDB) plans to sell $1 billion of Islamic bonds to fund development projects in its member countries, Vice President Abdul Aziz Al Hinai said on Tuesday. The five-, seven- and 10-year Sukuk, part of the IDB's $3.5 billion Medium-Term Note program, will be issued in the fourth quarter and listed in London and Kuala Lumpur, Al Hinai told reporters in the Malaysian capital after registering a separate ringgit issuance on the local exchange. CIMB Group Holdings Bhd. and four international banks will manage the sale, he said. Global sales of Sukuk 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, said Badlisyah Abdul Ghani, head of CIMB's Islamic banking unit. Issuance will climb to as much as $25 billion from about $20 billion last year, he said. “The market is buzzing with new liquidity,” said Badlisyah. “We have seen announcements in the Saudi market where corporate is coming in, announcing that they will be doing riyal sukuk. There are companies in Malaysia coming in very aggressively in the second half and three are coming in within this month. So the pipeline is healthy.” Saudi Electricity Co., the Arab world's largest utility company, may issue Sukuk in 2011 after a sale in April of SR7 billion ($1.9 billion), Executive Director of Treasury Fahad Alsudairy said on May 18. Khazanah Nasional Bhd., Malaysia's state investment agency, sold S$1.5 billion ($1.1 billion) of five- and 10-year Islamic notes on Aug. 11, and the nation's biggest mortgage company Cagamas Bhd. sold 1 billion ringgit ($318 million) on Aug. 19. The IDB, which has 56 member countries including Egypt, Saudi Arabia and Turkey, is financing up to $8 billion of projects in 2010, said Vice President Al Hinai. The proceeds from the Sukuk will be used to mostly finance infrastructure development of $3 billion to $3.5 billion, projects that “are highly needed for the growth of our member countries,” he said. The Sukuk are rated AAA by Standard & Poor's, according to a statement issued by the bank on Tuesday. IDB's ringgit Sukuk listing in Malaysia, the world's largest market for Islamic bonds, adds to those completed by Nomura Holdings Inc. and General Electric Capital Corp. The lender has sold 400 million ringgit under the 10-year, 1 billion ringgit Sukuk program so far, and $1.1 billion under the dollar plan, Al Hinai said. Islamic finance transactions are based on the exchange of asset flows rather than interest to comply with the religion's Shariah principles. Shariah-compliant notes returned 3.8 percent this quarter, up from 0.8 percent in the previous three months, according to the HSBC/NASDAQ Dubai US Dollar Sukuk Index. “Islamic finance is a new asset class that has the potential to bring new economic growth to our member countries,” Al Hinai said. “The potential for the growth of Islamic finance is clear. It is essential for all of us to look beyond the current global financial turbulence and treat the development of Islamic finance as an investment for the future.” The global Sukuk issuance is forecast to reach $30 billion in 2010 in light of the recovery in global economic activity and the increase of sovereign wealth funds, companies, and the revival of private sector projects, KFH Research Limited said in its report released on Monday. “There seemed to be a recovery in the growth of the total value of Sukuk issuance in 2009 and during the first half of this year,” it noted. In the GCC region, Saudi Arabia has allocated almost $70 billion to development projects for 2010, an increase of 16 percent y-o-y. Meanwhile, sovereign Islamic bonds from Asia to the 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, Moody's Investors Service said. 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 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, it said. According to the HSBC/NASDAQ Dubai Sovereign US Dollar Sukuk Index gained 1.6 percent this month, more than the 1.2 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. 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. “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. Shariah-compliant bonds returned 10 percent this year, according to the HSBC/NASDAQ Dubai US Dollar Sukuk Index. Debt in developing markets gained 14 percent, according to JPMorgan Chase & Co.'s EMBI Global Composite Index. The spread 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 US Dollar Sukuk Index. “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.” 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.
