June 2013
Islamic Finance Bulletin
Gulf One Lancaster Centre For Economic Research
lums.lancs.ac.uk/research/centres/golcer
From the Editor More than ever last month global markets demonstrated their dependence on the dominant twin economic forces of our times, namely the US and China. The impact of the policy shift by the Federal Reserve and the faltering statistics for activity on the other side of the world acted like a pincer movement, squeezing the confidence out of asset trends that were either still surging, in the case of stocks, or had turned the corner of doubt of doubt, in the case of bonds. Conditions would subsequently develop into something of a rout. The examples of that change of mood abound in this edition of the bulletin, including in the field of commodities. This time we bring also expert insights from practitioners servicing the Islamic finance industry as it treads its promising but uncertain path forward in various locales. Our interview with Moody’s in Dubai accounts for the general trends in the sector, highlighting topics related to the Gulf and Malaysia, industry harmonization, and Middle East concerns Additionally, the Indian legal firm Juris Corp describes the specific case of the subcontinent, where the sector’s potential in terms of recipient population has to be squared against the restraints that have applied at the administrative and political levels. The story of Tunisia’s deferment of the legal framework for sukuk issuance, among the monthly digest of news, is but one instance of the challenges to be met on the way to Islamic finance’s development.
Contents HIGHLIGHTS (p.3) RECENT DEVELOPMENTS (p.4) VIEWPOINTS (p.6) STOCK MARKETS (p.10) COMMODITIES (p.13) BOND AND CDS MARKETS (p.15) ACCOUNTANCY ISSUES (p.18) PERSPECTIVE (p.19)
Page 2
Highlights Gulf stocks: Bourses in the Gulf leapt higher in May in the wake of the region’s own evident momentum, backed by triple-digit oil prices, but also benefiting from the tailwind of the benchmark, developed markets. The conjunction in sentiment of global recovery becoming set, leading governments sustaining stimulus and GCC spending generating an escape velocity in local conditions gave irresistible impetus. The UAE’s indices stood out, the country having acquired a safe-haven appeal as well, with Dubai seemingly successfully reclaiming its commercial model.
Global fixed-income: By ominous contrast with stocks, bond markets took fright at the prospect of fresh central-bank liquidity being slowed. That the US Fed’s reference to tapering QE created such exaggerated reaction could be traced to the turn in the market some weeks previously, and the lack of logical support for bonds from an improving economy, wherein inflation might pick up and prompt the requirement of higher yields. US T-bonds fell the most for some four years, JGBs tumbled upon Japan’s policy confusion, and sukuk were inevitably affected too.
North Africa: Although relatively quiet compared to the tensions of the Middle East, the other side of MENA bore issues for the development of Islamic finance. Tunisia’s first issue of sukuk -- a key dimension of the sector’s impact in a number of countries seeking to raise funds – was subject to delay, owing to the political priority of drafting of a new constitution. This case, featuring a large state budget deficit to be covered, carried echoes of the situation in Egypt, where sukuk issuance has been qualified by political sensitivity related to the state assets involved.
Page 3
Recent Developments in the Islamic Finance Industry Tunisia’s Islamic bond issue delayed Tunisia’s first issue of sukuk is likely to be postponed to next year, given serial disruptions to legislative business, and adds to the pressure on government finances. The plan had been to raise $700 million this year, with government in the final stages of pushing through the necessary legislation, hoping parliament would approve the bill by end-April or early May. However, parliament has not begun considering it, being busy with drafting a new constitution. Tunisia is facing a large state budget deficit, expected to be around $3.2 billion this year. Source: Reuters, June 19th
GOLCER thinks that, besides adding more pressure on the country’s budget this year, the delay will affect the overall emergence of the Islamic finance industry in the country. There is intense competition even within the Islamic banking sectors in the region to gain the largest market share of interested investors. The government, led by moderate Islamists, has been working on the development of Islamic finance since the 2011 revolution. GOLCER also views the passage of the legislation to be subject to a massive controversy, given that sukuk will have to be backed by streams of income from individual state assets. The Egyptian example of drafting of its own sukuk bill shows that the selection of the backed assets is politically sensitive. QIB supporting Qatar First Bank Qatar Islamic Bank (QIB) has signed a $100m Murabaha facility with Qatar First Bank (QFB), which is the first independent, Shariah-compliant financial institution authorized by QFC Regulatory Authority. The plan seeks to build a strong relationship between the two banks, and reflects a multiple structured facility with a three-year tenor period. QFB has grown
Page 4
rapidly since its launch in 2009, with a strong track record of results. Source: The Global Islamic Finance Magazine, June 10th
GOLCER finds this initiative as representative of recent attempts to create conglomerates in the GCC region to meet or beat intensive competition from conventional banks, as well as contribute towards the growth of Shariah-compliant businesses in the local market. QIB is one example among many seeking to provide quickest solutions for the Islamic finance industry through creating partners, and at the same time has strengthened its presence in the market.
Saudi airports agency selects banks for sukuk With Saudi Arabia investing heavily in infrastructure projects and revamping many of its airports, the General Authority for Civil Aviation (GACA), overseeing the air industry in the Kingdom, has selected to handle a sukuk issue HSBC Holdings’ Saudi Arabian unit, the investment banking arm of state-owned National Commercial Bank and Standard Chartered (for which the programme is the first local-currency Saudi debt issue in which it has been involved). The sukuk is expected to draw significant demand from Saudi investors, backed by a guarantee from the Ministry of Finance. Source: Reuters, June 16th
programmes, to address the growing demand for GOLCER perceives this issuance of domestic sukuk as
professionals in Islamic finance. The agreement
helping to develop the Gulf’s local sukuk market. It
between the two bodies calls for collaborative work
also tends to help resolve the matter of GCC’s Islamic
on executive training, research reports on the industry,
financial institutions having to hold certain amounts
and an internship programme that will sponsor up to
of government securities to satisfy central bank
ten students at a time.
reserve rules. Source: Reuters, June 18th
Dubai makes plans for Islamic economy GOLCER thinks that, even with the rapid growth over The UAE’s Islamic Economy Higher Committee,
the last several years, the Islamic finance industry
chaired by Shaikh Mohammed bin Rashid Al
still lacks advanced specialization and professional
Maktoum, has discussed various initiatives to
certification which combines both academic and
transform the emirate of Dubai into the world’s
practical knowledge.
capital of Islamic economy. Dubai’s Islamic economy platform includes Islamic finance instruments, Islamic insurance, Islamic contracts arbitration, Islamic food industry and trade standards (halal food), and Islamic quality management standards. Source: Khaleej Times, June 7th
Malaysia’s tie-up with Kuwaiti bank Malaysia’s Islamic finance university and the research arm of Kuwait Finance House are working on joint projects to develop training and internship
Page 5
Viewpoint Opportunities in India for Islamic Finance and Banking by H, Jayesh, founder partner, and Hufriz Wadia, partner, Juris Corp There is growing recognition in the business and
through the Murabaha model and the Diminishing
financial world that the Islamic finance market in
Musharaka model respectively, although tax and
India is worth delving into, with a huge potential for
stamp duty will have to be examined for the relevant
growth, while the kickstart from government action
structure.
may still be required.
It is interesting to note that the Indian market has
In the state of Kerala in India, for instance, Islamic
already witnessed Shariah-compliant mutual funds,
financing has seen highs and lows (see box 1).
exchange-traded funds, portfolio management
India has the second largest Muslim population
schemes and even offshore Shariah funds investing in
in the world, and has seen consistently robust
Indian equities.
economic growth, coupled with a stable polity, over
Given the wide spectrum of stocks that comply with
the last few years.
the most conservative of the Shariah restrictions,
The opportunity of attracting investments in the
mutual funds form the ideal choice of product for in
Islamic Finance space is tremendous and as yet
the retail space.
mostly untapped, partly because of governmental
More opportunity for retail investors exists with the
and regulatory apathy, also an insufficient and
launch of (a) the BSE TASSIS Shariah 50 index by the
inadequate understanding of Islamic Finance among
Bombay Stock Exchange of India Limited (one of the
the general populace.
two national level stock exchanges), and (b) S&P BSE
A big positive factor has been that the Governor of
500 Shariah index, in conjunction with Dow Jones,
the Reserve Bank of India (RBI), the central bank,
designed to represent all the Shariah-compliant stocks
has acknowledged that the Bank is in talks with the
of the broad-based S&P BSE 500 index.
Government of India to facilitate the introduction of
The securities and mutual funds regulator in India,
Islamic Banking in the country.
SEBI, is seen to be rather agnostic towards Islamic
While details will need to be tended, this positive
Financing, and the SEBI (Mutual Funds) Regulations
approach provides a boost of confidence to those
1996 in this regard does not pose any particular
looking at India as a budding market for Shariah-
concern. Also, the return from these investments
compliant products.
would not be considered as “riba� under Shariah.
Islamic financing may be currently undertaken in
Perhaps in order to be seen as truly Shariah-compliant,
India through the non-banking, non-deposit-taking
it is necessary that the fund should be clearly
financial company (NBFC-ND) route, through retail
documented as a Mudaraba structure.
products on both the credit and investment side,
Offshore funds have proved to be a popular structure,
and through structured transactions (involving the
where foreign funds are channelled into the Indian
issuance of Sukuk-like notes) (see box 2).
economy either as Foreign Direct Investment (FDI) or
Microfinance, housing finance, leasing and finance,
Foreign Institutional Investors (FII).
commodity financing and reverse mortgage
Similar to the offshore funds model, a Musharaka
are possible within the present legal structure.
structure can be employed to deploy funds in
Microfinance and housing finance are achievable
Shariah-compliant companies on a profit-loss sharing
Page 6
mechanism. (Secura Venture was the first such fund
The action of KSIDC was challenged on the ground
in India to be licensed as a VC fund by SEBI in this
that it would be viewed as favouring a particular
context.)
religion or community by the state, violating the
As a product, Portfolio Management Schemes
Constitution of India. However, the court upheld
are tailor-made for high-net-worth individuals.
the Government’s argument that, through an
The SEBI (Portfolio Manager Regulations) 1996 is
Islamic investment house, it can attract the vast
again agnostic, and allows complete flexibility in
funds generated by non-resident Indians in the Gulf
structuring the arrangement between the client and
countries. That shed light on the attitude of the
the portfolio manager. The Reliance Shariah Portfolio
judiciary towards Islamic Finance in India in general.
Management Scheme has set the precedent in this
A fall-back of the Kerala litigation was scrutiny by
regard.
the RBI, revoking the licence of a Shariah-compliant
It is envisaged that the real estate sector would be
NBFC based in Kerala on the grounds of technical
popular for Shariah-compliant investors and funds, as
non-compliance with RBI regulations. The said NBFC
real estate is easily acceptable as a Sharia-compliant
has filed a writ against RBI’s order in the High Court of
asset.
Mumbai, and the matter is still sub-judice.
The mutual funds regulations were amended to allow
Juris Corp is of the opinion that the RBI action is
schemes in this sector. Apart from the traditional
not a reflection of any impediment to the growth
model, investments in realty companies by pooling
of Islamic finance, but rather a recognition that this
through an SPV have of late become quite common.
form of financing may exist provided it complies with
Such investments generally tend to be in the form of
the other requirements of the well-regulated Indian
private equity in specific projects proposed by realty
financial economy.
companies. Specific trusts pool money from wealthy individuals and then invest in housing/commercial
Box 2
constructions.
NBFC-NDs are lightly-regulated (based on
There is a large segment of the Indian population that currently steers clear of conventional forms of banking and funding. Islamic financing (even if not Islamic Banking at this stage) can fill this gap even within the current regulatory scenario. Issues like stamp duties and double taxation, although a concern, may be overcome with the use of the right structures. As a firm, Juris Corp is confident that the future is bright for Islamic Financing in India, and that Islamic Banking will not be far behind. Box 1 The Kerala High Court in its landmark judgment in early 2011 allowed the Kerala State Industrial Development Corporation (KSIDC, a state-sponsored institution) to take a stake in a private company set up to carry out Sharia-compliant financing activities in India.
parameters such as registration requirement, low capital threshold, leverage) in India, vis-a-vis banks and deposit-accepting NBFCs, thereby allowing more freedom to set up business and operate in a Shariahcompliant manner. The NBFC-ND model allows 100% foreign investment in NBFCs engaged in certain specific sectors, which would cover most of the typical Shariah activities, e.g. Merchant Banking, Portfolio Management Services, Investment Advisory Services, Asset Management, Venture Capital, Leasing & Finance, Housing Finance, Micro Credit, etc. Also, as regards undertaking Ijara activities, entities whose principal business is that of leasing and hirepurchase have to be registered with the RBI. These NBFCs are classified as “asset finance companies” for the purpose of applicability of prudential norms issued by the RBI.
Page 7
Viewpoint A review of current themes in Islamic finance Interview with Khalid Howladar, VP and Senior Credit Officer, Financial Institutions Group, Moody’s Investors Service, Dubai How are Islamic finance institutions in the Gulf faring relative to their conventional counterparts, following the experience of the global financial crisis? Has their strategy or evolution since the downturn been notably affected, revised in any particular way? Gulf banks in general have weathered the crisis quite well, although the six GCC countries have shown quite different approaches in tackling the problems created. Most banks in the region are very well capitalised and now quite liquid, with Dubai banks in particular still suffering from legacy issues.
are some Shariah-driven differences in the products
Islamic finance institutions (IFIs) have actually fared
offered by the IFIs in both markets, with Malaysia
poorer on average than the [local] conventional
being perceived as more liberal than the GCC. A key
counterparts, owing to an excess of real estate
advantage of the Malaysian system is the common
exposure that, while being more Shariah-compliant
regulatory and Shariah environment that improves
that many other types of financing, unfortunately
transparency of the sector and improves liquidity for
generated a lot of impairments across the GCC, due
the sukuk market.
to the volatility and immaturity of the market. On the plus side, however, IFIs tend to show a strong retail customer deposit base, providing a very good funding and liquidity position for the bank. Do you have an impression of the key differences (and their implications) between the business and balance sheets of the Islamic finance institutions in the Gulf on the one hand, and Malaysia and any other locations on the other?
Broadly speaking, aside from the fact that the two regions exhibit significant differences in their economies and operating environments, there
Page 8
Given that there remain clear discrepancies among scholarly Shariah opinion, as well as between scholars, market practitioners and association bodies, what are your expectations of the harmonization of regulation and product standards across the global Islamic finance space? Not very optimistic in the GCC, to be fair. A topdown approach is needed (like Malaysia), but numerous GCC states have expressed their goal of being the regional centre of Islamic finance, and are hence effectively competing with each other. The UAE has probably the most active capital markets base, but Saudi Arabia has the domestic volume to create its own liquid market and do its own thing. Qatar too is leveraging a lot, but is still small. With such a diverse pool of players and motives, I think it will be a while to reach a meaningful consensus on what in many cases is a moral and hence personal topic for many scholars. However, we have started to see
for banks, the long-term trends and opportunities for the sector remain strong in these countries given their sizable Muslim populations, and particularly given the fact they are starting from a low base, where conventional finance is still the norm.
some harmonisation in the sukuk structures that Moody’s has been asked to rate over the last year or so, this aspect being pretty important for secondary market liquidity. What do you think of recent events and trends in Turkey and Egypt, in terms of the outlook for the development of Islamic finance in these potentially dynamic growth markets?
Despite the political troubles in these markets, Islamic finance remains a retail-driven phenomenon. It’s the people themselves that seek to express an additional affinity with their faith by banking Islamically. While political instability can severely impact the operating environment
Page 9
Stock Markets GCC Gulf bourses all pushed smartly ahead in May, jumping to a higher plateau in an outstanding month of returns, against a backdrop of buoyancy in developed markets. Though slower picking up than neighbours, with oil prices dipping, Saudi Arabia’s Tadawul index nevertheless featured surges in the retail and real estate sectors, as domestic growth maintained its impressive
of President Mursi approaches at end-June, with
momentum. The UAE’s notable uptrend remained
political agitation still in the air. Meanwhile,
intact again, with financials and real estate forging
Turkey’s Borsa Istanbul index beat a retreat, and
forward in Abu Dhabi, and telecoms and broader
the lira slipped to its lowest for nearly eighteen
services doing so in Dubai. The country continued
months, as part of the generalized negative
to benefit from its safe haven appeal in the
reaction of emerging markets to the US Federal
regional context. A sudden impetus noticeably
Reserve’s suggestion that it may taper its
propelled Kuwait’s index as well, making up
quantitative easing programme, which has
ground previously lost upon signs of an improved
been substantially responsible for the liquidity
economy and a period of political stability.
surge behind international markets.
MENA
Far East
The Egyptian index plunged again upon the
Far East stocks stuttered in May as the
pessimism associated with the continuing pressure
generally positive tone of recent months was
on the country’s FX reserves position, albeit
overtaken by the implications of the QE policy
propped by an extra $3bn of funding from Qatar.
announcement in the US and latest Chinese
Critically, the IMF announced it had no plan to
data. The former indicated a curtailment of
send a team to finalize talks on its long-awaited
the liquidity promoting international funds
volatile as the first anniversary of the appointment
MENA
840 820
GCC
106
72.5
105
72
104 103
71
102
70.5
101
70
100
69.5
99 Correlation (1 mth) 0.965797
69 68.5 68 01−Mar
Page 10
98 97
19−Mar
06−Apr
24−Apr
12−May
31−May
96
Conventional Index
Islamic Index
71.5
Egypt Islamic Index
73
350 Correlation (1 mth) 0.39837
345
800
340
780
335
760
330
740
325
720
320
700 01−Mar
19−Mar
06−Apr
24−Apr
12−May
31−May
315
MENA Aggregate Index
standby loan. Conditions were expected to remain
flows, while the latter trimmed expectations of trade with the regional powerhouse. The hike
1.25 x 10
in bond yields experienced globally in the wake
Far East
4
410
of the Fed’s statement put pressure on regional
405
equities generally. Philippine shares in particular
the preceding weeks regional indices had been climbing either to record (e.g. Thailand) or multiyear (e.g. Singapore) heights upon hopes for
Correlation (1 mth) 0.37736
390 1.15
385 380
global growth. Malaysia’s bourse was boosted 1.1 01−Mar
by the general election outcome, Indonesia’s
395
Aggregate Far East
record highs following mid-term elections. In
Malaysia Islamic Index
were affected by profit-taking, having reached
400
1.2
19−Mar
06−Apr
24−Apr
12−May
31−May
375
by a change of finance minister, and Taiwan’s gains tax rules.
were however hit later in the month with a bout
S&P 500
Rest of the World Carrying on upwards through May, global stocks
World Conventional Benchmarks
1700
of profit-taking upon a combination of the Fed’s
1680
770
1660
760
1640
750
1620
740
1600
730
1580
720
1560
710
1540
surprise announcement on potential tapering
Correlation (1 mth) 0.677128
1520
of QE and the lack of supportive evidence of
1500 01−Mar
China’s latter-day locomotive economy. Until
780
19−Mar
06−Apr
24−Apr
12−May
31−May
Euronext 100
encouraged by amendment to proposed capital
700 690 680
these interruptions, US and Japanese equities in particular were benefiting from the sustained and enhanced rush of monetary liquidity. Several
World Islamic Benchmarks
2550
1860
indexes set five-year highs (UK and Japan), while
1840
2500
the S&P500 surpassed its all-time peak. In the US
the eurozone, and Q1 growth numbers emerged weak, European markets also set positive monthly figures, as the ECB cut interest rates. Asian markets were mixed in line with uneven economic statistics; Japan entered a sharp correction phase following a prominent advance.
DJ Islamic Index
Although unemployment rose to a record level in
2450
1800 Correlation (1 mth) 0.978233
2400
1780 1760
2350
2300 01−Mar
1740 19−Mar
06−Apr
24−Apr
12−May
31−May
FTSE Shariah World Index
1820
payrolls and manufacturing data beat forecasts.
1720
Sources: GIC, Global Investment House, Emirates NBD, Reuters, Bloomberg, broker reports
Page 11
Islamic Stock Indices Islamic or Shariah compliant indices exclude industries whose lines of business incorporate forbidden goods or where debts/ assets ratios exceed 33%. The increasing popularity of Islamic finance has led to the establishment of Shariah compliant stock indices in many stock markets across the world, even where local Muslim populations are relatively small, such as in China and Japan.
Evolution of Islamic Stock Markets in April 2013 for GCC, Far East, Middle East North Africa (MENA) and Rest of the World markets. Prices represent the closing price of the respective index at 30/4/2013. Percentage Month-to-Month (MTM) Change and percentage Volatility. Source: Datastream
Conventional Stock Indices
Volatility is a measure of uncertaincy of market returns. It is calculated as the standard deviation of the returns in the reported month. The formula for the standard deviation is: Ďƒ=E[(X-Îź)2]1/2
Evolution of Stock Markets in April 2013 for GCC, Far East, Middle East North Africa (MENA) and Rest of the World markets. Price represent the closing price of the respective index at 30/4/2013. Percentage Month-to-Month (MTM) Change and percentage Volatility. Source: Datastream
Page 12
Commodities Oil Oil prices kept a roughly sideways tendency in May
105
economic statistics were positive on balance, but not so
USD/barrel
fact showing the fourth consecutive monthly decline. were fuller, and inventory data also brought restraint. US
Brent Oil Dubai Oil WTI Oil
110
relative to significant historic movements, while in Expectations of demand softened, while supply prospects
Crude Oil
115
figures from Europe, and Chinese manufacturing was
100 95 90
reported soft. The resumption of service in the Keystone pipeline carrying Canadian crude was another moderating
85 01−Mar
factor. Analysts were divided whether the traditional summer impetus would kick in, or be overridden by the
4.4
medium-term pressures. OPEC’s rollover of production quotas, with its reference basket averaging $100 for the
19−Mar
06−Apr
24−Apr
12−May
31−May
Natural Gas Natural Gas
4.2 USD/MMBTU
month, also reflected the evenness of those outlooks. Events in Syria gave ongoing support to prices. The BrentWTI spread was little moved.
Natural Gas
4 3.8 3.6
Henry Hub changed direction in May, dipping mostly in the second half of the month. Prices were affected
3.4 01−Mar
essentially by forecasts for milder weather as well as
19−Mar
06−Apr
24−Apr
12−May
31−May
slackness in nuclear outages, meaning there was less call upon gas to fill the breach, compared to the typical extent of recent years. Stocks also rose quite sizably,
that is beginning to come onstream would seem to be to promote supply, the potential demand from abroad, subject to government approval, is expected to restructure international markets.
1550
1950
1500
1900 1850
1450
1800 1400 1350 01−Mar
1750 Precious Metals Index
19−Mar
06−Apr
24−Apr
12−May
31−May
1700
Gold
away from endless quantitative easing inevitably
Gold failed to make headway in May, and slipped back
would have taken some wind from the metal’s
towards the recent, localized trough. Impressions
sails, as it reacted in the same way as other assets
persisted that funds had switched instead into equities to
to the primacy of potential monetary policy over
both hedge against inflation and participate in economic
real indicators pointing the other way, i.e. to firmer
recovery. At the same time, retail demand appeared for
conditions. Platinum and silver also dropped.
gold bars, coins and jewellery at the reduced prices. The jury remained out as to whether the medium-term bull trend had been broken, but the US Fed’s repositioning
Precious Metals Index
game-changing impact of the US energy revolution
2050 2000
USD/Troy Ounce
the face of the steady climb seen this year. While the
2100
1600
further motivating the decline. The softening of prices nevertheless represented only a modest reaction in
Gold
1650
Copper/Base Metals Copper was relatively stable in the month, up slightly
Page 13
themselves in anticipation of demand from top consumer China improving in the medium term, with tightness in
3200
7200 3100
7000
arose of stockpiling by China following the price drop. Prices were nevertheless kept on the soft side by the modesty of
3000
6800
global economic data overall, notably Chinese factory orders,
6600 01−Mar
despite a hint of buoyancy in the US.
Sugar/Agriculturals
Base Metals Aggregate Index
19−Mar
06−Apr
24−Apr
12−May
31−May
Sugar
19
650
Agriculture Aggregate Index
Raw sugar fell at the fastest monthly rate since last August,
645
owing to the accumulation globally of excess supplies. Cane harvest in ideal weather -- Thailand, Australia and Mexico were generating a hefty seasonal surplus. Whereas stockpiling by China had in previous years removed a substantial part of supply, that process would not be repeated this time, for
18.5 USD cents/lb
crops in the key producing countries of Brazil -- with a bumper
640 635
18
630 625
17.5
620 615
domestic reasons. Meanwhile, refineries were expected to slow their activity as the whites-over-raws premium narrowed.
2900
17 01−Mar
19−Mar
06−Apr
24−Apr
12−May
31−May
610
Agriculture Aggregate Index
at Indonesia’s Grasberg mine also impacted, and suggestions
3300
7400 USD/MT
and other production concerns. The suspension of operations
3400
7600
the scrap market also relevant, while output from leading producer Chile fell year-on-year owing to labour stoppages
Copper
7800
Base Metals Aggregate Index
having slumped this year so far. Market players positioned
Analysts viewing the market technically imagined producers becoming nervous over seemingly fragile support for prices in such conditions.
booked profits. At the same time soy markets in the US also dipped in parallel following news that China, the world’s largest buyer of soybeans, had cancelled an order. Otherwise,
800 14.5
790 780
14
770 760 01−Mar
Soybean Oil
19−Mar
06−Apr
24−Apr
12−May
31−May
Soybean Oil (USD/Bsh)
slower demand for commodities dampened prices and traders
15
810 Palm Oil (USD/MT)
May, then paused for breath as weaker overseas markets and
15.5
820
Edible Oils Malaysian palm oil futures touched a two-month high in late
Palm & Soybean Oil
830
13.5
investors anticipated tight palm oil supplies and a pick-up in demand ahead of the fasting month of Ramadan, when subsequent communal feasting actually boosts consumption.
help further trim stocks. Charts showed palm oil liable
Inventories in Malaysia dropped below the key psychological
to rise into a higher range.
level of 2 million tonnes seen at the end of April. It was expected that May’s output would be next to stagnant and
Page 14
Sources: OPEC, Reuters, Bloomberg, Financial Times
Evolution of highly traded commodities in March 2013. MTM Change and Percentage Volatilities. US $ and US c indicate United States Dollar and United States cent repsectively. bbl = billion barrels, MMBTU = Million British Thermal Unists, MT = Metric Tonne, LB = Pound and Bsh=Bushel. Prices represent the price of the respective commodity at 29/3/2013. Source: Datastream
Bonds and CDS markets Bahrain Bond Yields & Prices
3.7
142
3.65
141.5
market fell harshly back in May, and spreads widened
3.6
141
3.55
140.5
3.5
140
3.45
139.5
3.4
139
3.35
138.5
retreat of US Treasuries, owing to the Fed’s apparent suggestion that its bond-buying (QE) programme could be tapered, led to sharp swings in Gulf trading. Invest AD reported that the brunt of the global effect was taken in the region at the longer end of the yield
3.3 01−Mar
curve, and in new issuance, with traders averse to keeping risk on their books and liquidity becoming extremely thin. Primary activity till that point had
9
19−Mar
06−Apr
24−Apr
12−May
138 31−May
Egypt Bond Yields & Prices
220
been firm as borrowers sought to take advantage of
215
the low-yield environment, and overall sentiment away and funds making their way to the sidelines as market turbulence began to emerge. Egypt / MENA With global funds flows turning nervous as described,
Yield to Maturity (%)
remained positive despite signs of volume dropping
8.5 210 8
200 7.5 195 7 01−Mar
the problems of Egypt could only be reflected further
205
Bond Index
across sovereign CDSs. The high volatility and
Yield to Maturity (%)
Following the reversal in benchmark bonds, the GCC
Bond Index
GCC
19−Mar
06−Apr
24−Apr
12−May
31−May
190
in an aggravated downturn for its international bonds during the month. Yields climbed in excess of 100
1.85
basis points (bps), and five-year CDS spreads widened
1.8
programme, prospectively to help cover the funding gap. Negotiations with the IMF remained in limbo, with the proposed economic plan still under review, also concern for the fiscal trend, and for the level of
278 277.5
1.75
277 276.5
1.7
Bond Index
were sold late in May, due 2014, from a $12bn EMTN
Yield to Maturity (%)
investment in the Mena region. With the country’s the calendar half-year point, $2.7bn of euro notes
279 278.5
37bps to 620. Egypt remains considered the most risky annual budget deficit heading for 11-12% of GDP at
Malaysia Bond Yields & Prices
276 275.5
1.65 01−Mar
19−Mar
06−Apr
24−Apr
12−May
275 31−May
political support necessary to implement reforms that would face resistance from the impoverished among
were upset by the Fed’s seeming change of emphasis
the population.
on its stimulus programme, Malaysia outperformed on
Malaysia / Far East
the basis of its sustained current account surplus, likely ringgit appreciation according to consensus forecasts,
Confidence returned to Malaysian markets in May
and returning attention to the government’s $444bn
once the possibility of a political earthquake was
investment programme in pursuit of developed-nation
removed, with the re-election of PM Razak’s Barisan
status. Economic growth is due to exceed 5% this
Nasional party alliance with 60% of parliamentary
year, and FX reserves are at their highest since 2008.
seats. While Asian markets and currencies generally
Page 15
Across the region, hard-currency debt funds showed outward flows, while local currency bond flows were inward, owing to the repatriating switch of portfolios
Sovereign Bond Markets
globally.
Global Benchmarks May was the month when bond markets really took fright at the prospect of the huge policy support and liquidity pipeline from the US being interrupted. The idea that American economic recovery may have sufficiently taken hold meant that the Federal Reserve suggested its continuing wedge of buying could be tapered, prompting the realization of a certain degree of market fear. Treasuries recorded their steepest loss since 2009, and related instruments suffered around the world. Most notable also was the very unwelcome hike in yields in Japan, where, aside of the international trend, the objective of the authorities to suppress bond interest rates was confounded by the reaction of investors to the determined plan to create inflation in the attempt to serve the government’s
Evolution of Bond Markets in April 2013 relative to the previous month. The table reports the price index on which the MTM Change is calculated (month-to-month) and the Yield of sovereign bond maturities typically between 6 months and 25 years. Data as at 30/4/2013.
hopes for economic growth. The intrinsic dilemma of the strategy evidently flashed danger signals for a
Credit Default Swap Markets
country already saddled with very high levels of debt issuance and servicing obligation. Sources: Bloomberg, Reuters, Emirates NBD, Invest AD, Financial Times
US Bond Yields & Prices
158
2.3
157
2.2
156
2.1
155
2
154
1.9
153
1.8
152
1.7
151
1.6 01−Mar
Page 16
19−Mar
06−Apr
24−Apr
12−May
31−May
150
Bond Index
Yield to Maturity (%)
2.4
Evolution of CDS Spreads in April 2013 relative to the previous month. The index reported here represents the average basis points (bp) of a 5-year CDS for protection against sovereign bonds. Data as at 30/4/2013. MTM Change refers to the change relative to the previous month.
Islamic Bonds (Sukuk) Islamic bonds were caught by the sharp reversal in fixed-income generally on the month, although sukuk Middle−East Conventional Bond Index (MEBI)
outperformed conventional instruments in secondary
4
market trading, down 0.83% relative to 1.81%.
3.95
Reporting research by KFH, the Kuwait news agency
$12.1bn of new issuances around the globe, bringing the five-month total to $55.8bn. Malaysia accounted for almost two-thirds of the monthly increase. The proportion in ringgit was likewise; also that of sovereign issuers. Seeking to raise $1bn, Islamic Development Bank (IDB)
107
3.85 3.8
106.5
3.75
106
3.7
Clean Price
market’s growth momentum, with the addition of
107.5
3.9 Yield to Maturity (%)
KUNA cited a continuation nevertheless in the primary
108
105.5
3.65 3.6 01−Mar
19−Mar
06−Apr
24−Apr
12−May
105 31−May
Source: HSBC Nasdaq Dubai
issued a five-year sukuk priced at 1.535%, with orders of $1.5bn. The multilateral institution has more than tripled its authorised capital to $150 billion to support 3.6
Saudi Arabian real estate development company Dar
3.5
Al Arkanm closed the first tranche of a $750m sukuk
3.4
offering a coupon of 5.75%. Bookrunners were Bank Alkhair, Deutsche Bank, Goldman Sachs and Emirates NBD Capital. Two non-GCC Mena heavyweights flirted with the market in May. Egypt intends to issue its debut sovereign Islamic bond early next year, hoping to ease pressure on its public finances, according to the prospectus for a new $12
HSBC−NASDAQ Dubai Sukuk Index (SKBI)
101
100.5
3.3 3.2
100
3.1 3
Clean Price
programme, which was some four times oversubscribed,
Yield to Maturity (%)
development projects among its 56 member nations.
99.5
2.9 2.8 01−Mar
19−Mar
06−Apr
24−Apr
12−May
99 31−May
Source: HSBC Nasdaq Dubai
billion bond programme. HSBC Holdings and Qatar National Bank were appointed joint lead arrangers. Meanwhile, there were two corporate issuances from Turkey during the month, with Istanbul known to be minded to develop itself as a financial centre and tap into the substantial liquidity perceived available in the Islamic finance sector. Sources: GIC, Reuters, Kuwait News Agency, Arab News
Sukuk is the Arabic name for financial certificates, but commonly refers to the Islamic equivalent of bonds. Since fixed income, interest bearing bonds are not permissible in Islam, Sukuk securities are structured to comply with the Islamic law and its investment principles, which prohibits the charging, or paying of interest. Financial assets that comply with the Islamic law can be classified in accordance with their tradability and nontradability in the secondary markets.
Page 17
Accountancy Issues, Rules and Regulations Qatar Central Bank tightens banks’ securities
(IIFM), a non-profit industry body which develops
investments
specifications for Islamic finance contracts. The
Qatar’s central bank has tightened how much banks (both Islamic and conventional) can invest in stocks and bonds. From now on, real estate investment by Islamic banks will be limited to 10% of capital & reserves (from 30%). Conventional banks’ total investment in equities and debt instruments must be limited to 25% of capital & reserves, while debt instruments issued by the government and national banks are exempt from the limits. Previously, under instructions to banks issued in November 2011, the limits were 30% each for equities and debt instruments. The central bank has also set new limits for investment in individual companies and unlisted securities, and introduced a 15% ceiling for total securities investment outside Qatar. The central bank did not provide reasons for its new rules, or stipulate when they will be implemented. However, Qatar is gearing up to spend tens of billions of dollars on major infrastructure projects and to develop its government debt market. Source: Reuters, June 16th
GOLCER views these rules as pressuring banks to retain more funds, and transfer liquidity out of the public capital markets, in order to lend into the economy as well as promote infrastructure projects or lend to government. However, Islamic banks are hardly affected in respect of real estate. Only Qatar International Islamic Bank will be affected by the new ruling, with a ratio of 29% invested in property.
New standard for Islamic interbank transactions A standard contract template for Islamic interbank transactions has been launched by the Bahrainbased International Islamic Financial Market
Page 18
main objective is to reduce over-reliance on commodity Murabaha (a common cost-plus profit arrangement), and encourage greater use of unrestricted wakala (an agency agreement where an investor authorises an agent to manage a pool of assets following religious principles). This is not the first wakala standard in the market; a template was launched by Malaysia’s association of Islamic banks in 2009. The IIFM started operations in 2002, founded by the Jeddah-based Islamic Development Bank and the central banks and monetary authorities of Bahrain, Brunei, Indonesia, Malaysia and Sudan. Source: The Arabian Business News, June 4th
GOLCER views this standard as part of efforts to harmonise industry practices as well as mitigate the range of liquidity management challenges facing the industry. However, the absence of documentation with clear guidance has limited the broader use of IIFM standards worldwide.
Perspective The importance of being the dollar, and what it represents by Andrew Shouler Essentially all global markets have been affected in the past month by the policymaking switch in the US, namely to taper quantitative easing (QE). Although Fed chairman Bernanke has stipulated that this pronouncement is subject to the state of the economy, and means easing off the accelerator rather than pressing on the brake, stocks, bonds and commodities have reacted as if that amounts to a sharp change in direction. They have sharply changed direction themselves. For investors wondering what they can do to protect themselves, it can be a struggle, following the
A host of emerging-market currencies have taken a dive in recent weeks, with funds flows undergoing repatriation. What we can perceive is that, though the dollar may experience extended episodes of decline, it has the capacity inherently to recover.
exceptional risk-on/risk-off aspect to market behaviour
Even the shale phenomenon can arguably be viewed
since the global financial crisis, also with leading
in a structural sense rather than interpreted as just a
governments committed to keeping interest rates very
windfall. Other countries and continents have been
low, so that returns to cash are negative in real terms.
thoroughly blessed with huge mineral resources that
One thing that has proven its worth, relatively speaking, is the US dollar, despite (a) the origination of the crisis in the US itself, and lingering public
could be exploited properly for the broader benefit, but have fallen victim to unhelpful political and economic realities applying in those regions.
indebtedness, and (b) the fact that QE has deliberately
In the US it is noticeable that shale’s prospects rely
stoked the greenback’s availability. The word irony
significantly on the prospectors themselves and what is
might have been invented for that outcome.
actually their private property underground. Doubtless
By comparison, the euro has held steady in the face of the dramas and dilemmas blocking its path. Yet,
it helps to have a lot of land – but America is not alone in that respect.
the European Central Bank has not indulged in QE
Developing nations may present outstanding growth
in the same way as the US, so purely on a supply
opportunities by way of their emergence into the
and demand basis it should probably be higher. It’s
market light or the successful development of their
just that the US is demonstrating greater growth
endowments, but prolonged credibility requires a track
opportunities.
record of constant economic renewal upon a platform
Similarly, the yen for some years maintained a
of legal and political reliability.
strength, even safe-haven status, despite a relatively
The US undoubtedly has many enough problems of its
moribund economy and its use by FX traders for carry-
own. But when there are few rivals offering convincing
trade purposes. Yet the government has succumbed
counterparts to its proven precedents, then the dollar’s
to the idea that Japan’s difficulties should be solved
longevity, liquidity, a highly-developed economic
by a starburst of cyclical demand management, rather
and financial system and underlying commitment to
than a concerted unpicking of its supply structures. So
markets and capitalism obviously go a very long way in
the dollar has broken through Yen100.
the minds of investors.
Page 19
Marwan Izzeldin Director m.izzeldin@lancaster.ac.uk Andrew Shouler Editor a.shouler@lancaster.ac.uk
Research Team Gerry Steele g.steele@lancaster.ac.uk Vasileios Pappas v.pappas@lancaster.ac.uk Rhea George r.george@lancaster.ac.uk Marwa El Nahass m.elnahass@lancaster.ac.uk
DISCLAIMER This report was prepared by Gulf One Lancaster Centre for Economic Research (GOLCER) and is of a general nature and is not intended to provide specific advice on any matter, nor is it intended to be comprehensive or to address the circumstances of any particular individual or entity. This material is based on current public information that we consider reliable at the time of publication, but it does not provide tailored investment advice or recommendations. It has been prepared without regard to the financial circumstances and objectives of persons and/or organisations who receive it. The GOLCER and/or its members shall not be liable for any losses or damages incurred or suffered in connection with this report including, without limitation, any direct, indirect, incidental, special, or consequential damages. The views expressed in this report do not necessarily represent the views of Gulf One or Lancaster University. Redistribution, reprinting or sale of this report without the prior consent of GOLCER is strictly forbidden.