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Islamic Finance Bulletin June 2013 lums.lancs.ac.uk/research/centres/golcer Gulf One Lancaster Centre For Economic Research
Islamic Finance Bulletin
June 2013
lums.lancs.ac.uk/research/centres/golcer
Gulf One Lancaster Centre For Economic Research
Page 2
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.
ContentsHIGHLIGHTS (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 3
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.
Highlights
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
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.
Page 4
Recent Developments in the Islamic Finance Industry
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
GOLCER perceives this issuance of domestic sukuk as
helping to develop the Gulf’s local sukuk market. It
also tends to help resolve the matter of GCC’s Islamic
financial institutions having to hold certain amounts
of government securities to satisfy central bank
reserve rules.
Dubai makes plans for Islamic economy
The UAE’s Islamic Economy Higher Committee,
chaired by Shaikh Mohammed bin Rashid Al
Maktoum, has discussed various initiatives to
transform the emirate of Dubai into the world’s
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
programmes, to address the growing demand for
professionals in Islamic finance. The agreement
between the two bodies calls for collaborative work
on executive training, research reports on the industry,
and an internship programme that will sponsor up to
ten students at a time.
Source: Reuters, June 18th
GOLCER thinks that, even with the rapid growth over
the last several years, the Islamic finance industry
still lacks advanced specialization and professional
certification which combines both academic and
practical knowledge.
Page 5
Viewpoint
Opportunities in India for Islamic Finance and Bankingby H, Jayesh, founder partner, and Hufriz Wadia, partner, Juris Corp
There is growing recognition in the business and
financial world that the Islamic finance market in
India is worth delving into, with a huge potential for
growth, while the kickstart from government action
may still be required.
In the state of Kerala in India, for instance, Islamic
financing has seen highs and lows (see box 1).
India has the second largest Muslim population
in the world, and has seen consistently robust
economic growth, coupled with a stable polity, over
the last few years.
The opportunity of attracting investments in the
Islamic Finance space is tremendous and as yet
mostly untapped, partly because of governmental
and regulatory apathy, also an insufficient and
inadequate understanding of Islamic Finance among
the general populace.
A big positive factor has been that the Governor of
the Reserve Bank of India (RBI), the central bank,
has acknowledged that the Bank is in talks with the
Government of India to facilitate the introduction of
Islamic Banking in the country.
While details will need to be tended, this positive
approach provides a boost of confidence to those
looking at India as a budding market for Shariah-
compliant products.
Islamic financing may be currently undertaken in
India through the non-banking, non-deposit-taking
financial company (NBFC-ND) route, through retail
products on both the credit and investment side,
and through structured transactions (involving the
issuance of Sukuk-like notes) (see box 2).
Microfinance, housing finance, leasing and finance,
commodity financing and reverse mortgage
are possible within the present legal structure.
Microfinance and housing finance are achievable
through the Murabaha model and the Diminishing
Musharaka model respectively, although tax and
stamp duty will have to be examined for the relevant
structure.
It is interesting to note that the Indian market has
already witnessed Shariah-compliant mutual funds,
exchange-traded funds, portfolio management
schemes and even offshore Shariah funds investing in
Indian equities.
Given the wide spectrum of stocks that comply with
the most conservative of the Shariah restrictions,
mutual funds form the ideal choice of product for in
the retail space.
More opportunity for retail investors exists with the
launch of (a) the BSE TASSIS Shariah 50 index by the
Bombay Stock Exchange of India Limited (one of the
two national level stock exchanges), and (b) S&P BSE
500 Shariah index, in conjunction with Dow Jones,
designed to represent all the Shariah-compliant stocks
of the broad-based S&P BSE 500 index.
The securities and mutual funds regulator in India,
SEBI, is seen to be rather agnostic towards Islamic
Financing, and the SEBI (Mutual Funds) Regulations
1996 in this regard does not pose any particular
concern. Also, the return from these investments
would not be considered as “riba” under Shariah.
Perhaps in order to be seen as truly Shariah-compliant,
it is necessary that the fund should be clearly
documented as a Mudaraba structure.
Offshore funds have proved to be a popular structure,
where foreign funds are channelled into the Indian
economy either as Foreign Direct Investment (FDI) or
Foreign Institutional Investors (FII).
Similar to the offshore funds model, a Musharaka
structure can be employed to deploy funds in
Shariah-compliant companies on a profit-loss sharing
Page 6
mechanism. (Secura Venture was the first such fund
in India to be licensed as a VC fund by SEBI in this
context.)
As a product, Portfolio Management Schemes
are tailor-made for high-net-worth individuals.
The SEBI (Portfolio Manager Regulations) 1996 is
again agnostic, and allows complete flexibility in
structuring the arrangement between the client and
the portfolio manager. The Reliance Shariah Portfolio
Management Scheme has set the precedent in this
regard.
It is envisaged that the real estate sector would be
popular for Shariah-compliant investors and funds, as
real estate is easily acceptable as a Sharia-compliant
asset.
The mutual funds regulations were amended to allow
schemes in this sector. Apart from the traditional
model, investments in realty companies by pooling
through an SPV have of late become quite common.
Such investments generally tend to be in the form of
private equity in specific projects proposed by realty
companies. Specific trusts pool money from wealthy
individuals and then invest in housing/commercial
constructions.
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.Page 7
The action of KSIDC was challenged on the ground
that it would be viewed as favouring a particular
religion or community by the state, violating the
Constitution of India. However, the court upheld
the Government’s argument that, through an
Islamic investment house, it can attract the vast
funds generated by non-resident Indians in the Gulf
countries. That shed light on the attitude of the
judiciary towards Islamic Finance in India in general.
A fall-back of the Kerala litigation was scrutiny by
the RBI, revoking the licence of a Shariah-compliant
NBFC based in Kerala on the grounds of technical
non-compliance with RBI regulations. The said NBFC
has filed a writ against RBI’s order in the High Court of
Mumbai, and the matter is still sub-judice.
Juris Corp is of the opinion that the RBI action is
not a reflection of any impediment to the growth
of Islamic finance, but rather a recognition that this
form of financing may exist provided it complies with
the other requirements of the well-regulated Indian
financial economy.
Box 2
NBFC-NDs are lightly-regulated (based on
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 Shariah-
compliant 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 hire-
purchase 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.
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.
Islamic finance institutions (IFIs) have actually fared
poorer on average than the [local] conventional
counterparts, owing to an excess of real estate
exposure that, while being more Shariah-compliant
that many other types of financing, unfortunately
generated a lot of impairments across the GCC, due
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
are some Shariah-driven differences in the products
offered by the IFIs in both markets, with Malaysia
being perceived as more liberal than the GCC. A key
advantage of the Malaysian system is the common
regulatory and Shariah environment that improves
transparency of the sector and improves liquidity for
the sukuk market.
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 top-
down 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
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
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.
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
momentum. The UAE’s notable uptrend remained
intact again, with financials and real estate forging
forward in Abu Dhabi, and telecoms and broader
services doing so in Dubai. The country continued
to benefit from its safe haven appeal in the
regional context. A sudden impetus noticeably
propelled Kuwait’s index as well, making up
ground previously lost upon signs of an improved
economy and a period of political stability.
MENA
The Egyptian index plunged again upon the
pessimism associated with the continuing pressure
on the country’s FX reserves position, albeit
propped by an extra $3bn of funding from Qatar.
Critically, the IMF announced it had no plan to
send a team to finalize talks on its long-awaited
standby loan. Conditions were expected to remain
volatile as the first anniversary of the appointment
of President Mursi approaches at end-June, with
political agitation still in the air. Meanwhile,
Turkey’s Borsa Istanbul index beat a retreat, and
the lira slipped to its lowest for nearly eighteen
months, as part of the generalized negative
reaction of emerging markets to the US Federal
Reserve’s suggestion that it may taper its
quantitative easing programme, which has
been substantially responsible for the liquidity
surge behind international markets.
Far East
Far East stocks stuttered in May as the
generally positive tone of recent months was
overtaken by the implications of the QE policy
announcement in the US and latest Chinese
data. The former indicated a curtailment of
the liquidity promoting international funds
01−Mar 19−Mar 06−Apr 24−Apr 12−May 31−May68
68.5
69
69.5
70
70.5
71
71.5
72
72.5
73
Isla
mic
Ind
ex
96
97
98
99
100
101
102
103
104
105
106
Co
nv
en
tio
na
l In
de
x
GCC
0.965797Correlation (1 mth)
01−Mar 19−Mar 06−Apr 24−Apr 12−May 31−May700
720
740
760
780
800
820
840
Eg
yp
t Is
lam
ic I
nd
ex
315
320
325
330
335
340
345
350
ME
NA
Ag
gre
ga
te I
nd
ex
MENA
0.39837Correlation (1 mth)
Stock Markets
Page 10
flows, while the latter trimmed expectations of
trade with the regional powerhouse. The hike
in bond yields experienced globally in the wake
of the Fed’s statement put pressure on regional
equities generally. Philippine shares in particular
were affected by profit-taking, having reached
record highs following mid-term elections. In
the preceding weeks regional indices had been
climbing either to record (e.g. Thailand) or multi-
year (e.g. Singapore) heights upon hopes for
global growth. Malaysia’s bourse was boosted
by the general election outcome, Indonesia’s
by a change of finance minister, and Taiwan’s
encouraged by amendment to proposed capital
gains tax rules.
Rest of the World
Carrying on upwards through May, global stocks
were however hit later in the month with a bout
of profit-taking upon a combination of the Fed’s
surprise announcement on potential tapering
of QE and the lack of supportive evidence of
China’s latter-day locomotive economy. Until
these interruptions, US and Japanese equities
in particular were benefiting from the sustained
and enhanced rush of monetary liquidity. Several
indexes set five-year highs (UK and Japan), while
the S&P500 surpassed its all-time peak. In the US
payrolls and manufacturing data beat forecasts.
Although unemployment rose to a record level in
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.
Sources: GIC, Global Investment House, Emirates NBD,
Reuters, Bloomberg, broker reports
01−Mar 19−Mar 06−Apr 24−Apr 12−May 31−May1.1
1.15
1.2
1.25 x 10 4
Ma
lay
sia
Isla
mic
Ind
ex
375
380
385
390
395
400
405
410
Ag
gre
ga
te F
ar
Ea
st
Far East
0.37736Correlation (1 mth)
01−Mar 19−Mar 06−Apr 24−Apr 12−May 31−May1500
1520
1540
1560
1580
1600
1620
1640
1660
1680
1700S
&P
50
0
680
690
700
710
720
730
740
750
760
770
780
Eu
ron
ex
t 1
00
World Conventional Benchmarks
0.677128Correlation (1 mth)
01−Mar 19−Mar 06−Apr 24−Apr 12−May 31−May2300
2350
2400
2450
2500
2550
DJ
Isla
mic
In
de
x
1720
1740
1760
1780
1800
1820
1840
1860World Islamic Benchmarks
FT
SE
Sh
ari
ah
Wo
rld
In
de
x
0.978233Correlation (1 mth)
Page 11
Islamic or Shariah compli-ant indices exclude indus-tries whose lines of busi-
ness incorporate forbidden goods or where debts/
assets ratios exceed 33%. The increasing popular-ity 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.
Volatility is a measure of un-certaincy of market returns. It is calculated as the standard
deviation of the returns in the reported month. The formula for the standard deviation is:
σ=E[(X-μ)2]1/2
Islamic Stock Indices
Conventional Stock Indices
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. Percent-age Month-to-Month (MTM) Change and percentage Volatility. Source: Datastream
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
CommoditiesOil
Oil prices kept a roughly sideways tendency in May
relative to significant historic movements, while in
fact showing the fourth consecutive monthly decline.
Expectations of demand softened, while supply prospects
were fuller, and inventory data also brought restraint. US
economic statistics were positive on balance, but not so
figures from Europe, and Chinese manufacturing was
reported soft. The resumption of service in the Keystone
pipeline carrying Canadian crude was another moderating
factor. Analysts were divided whether the traditional
summer impetus would kick in, or be overridden by the
medium-term pressures. OPEC’s rollover of production
quotas, with its reference basket averaging $100 for the
month, also reflected the evenness of those outlooks.
Events in Syria gave ongoing support to prices. The Brent-
WTI spread was little moved.
Natural Gas
Henry Hub changed direction in May, dipping mostly
in the second half of the month. Prices were affected
essentially by forecasts for milder weather as well as
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,
further motivating the decline. The softening of prices
nevertheless represented only a modest reaction in
the face of the steady climb seen this year. While the
game-changing impact of the US energy revolution
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.
Gold
Gold failed to make headway in May, and slipped back
towards the recent, localized trough. Impressions
persisted that funds had switched instead into equities to
both hedge against inflation and participate in economic
recovery. At the same time, retail demand appeared for
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
01−Mar 19−Mar 06−Apr 24−Apr 12−May 31−May3.4
3.6
3.8
4
4.2
4.4Natural Gas
US
D/M
MB
TU
Natural Gas
01−Mar 19−Mar 06−Apr 24−Apr 12−May 31−May85
90
95
100
105
110
115Crude Oil
US
D/b
arr
el
Brent OilDubai OilWTI Oil
01−Mar 19−Mar 06−Apr 24−Apr 12−May 31−May1350
1400
1450
1500
1550
1600
1650
US
D/T
roy
Ou
nce
1700
1750
1800
1850
1900
1950
2000
2050
2100
Pre
cio
us
Me
tals
Ind
ex
Gold
Precious Metals Index
Page 13
away from endless quantitative easing inevitably
would have taken some wind from the metal’s
sails, as it reacted in the same way as other assets
to the primacy of potential monetary policy over
real indicators pointing the other way, i.e. to firmer
conditions. Platinum and silver also dropped.
Copper/Base MetalsCopper was relatively stable in the month, up slightly
having slumped this year so far. Market players positioned
themselves in anticipation of demand from top consumer
China improving in the medium term, with tightness in
the scrap market also relevant, while output from leading
producer Chile fell year-on-year owing to labour stoppages
and other production concerns. The suspension of operations
at Indonesia’s Grasberg mine also impacted, and suggestions
arose of stockpiling by China following the price drop. Prices
were nevertheless kept on the soft side by the modesty of
global economic data overall, notably Chinese factory orders,
despite a hint of buoyancy in the US.
Sugar/Agriculturals
Raw sugar fell at the fastest monthly rate since last August,
owing to the accumulation globally of excess supplies. Cane
crops in the key producing countries of Brazil -- with a bumper
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
domestic reasons. Meanwhile, refineries were expected to
slow their activity as the whites-over-raws premium narrowed.
Analysts viewing the market technically imagined producers
becoming nervous over seemingly fragile support for prices in
such conditions.
Edible Oils
Malaysian palm oil futures touched a two-month high in late
May, then paused for breath as weaker overseas markets and
slower demand for commodities dampened prices and traders
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,
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.
Inventories in Malaysia dropped below the key psychological
level of 2 million tonnes seen at the end of April. It was
expected that May’s output would be next to stagnant and
01−Mar 19−Mar 06−Apr 24−Apr 12−May 31−May6600
6800
7000
7200
7400
7600
7800
US
D/M
T
2900
3000
3100
3200
3300
3400
Ba
se M
eta
ls A
gg
reg
ate
Ind
ex
Copper
Base Metals Aggregate Index
01−Mar 19−Mar 06−Apr 24−Apr 12−May 31−May17
17.5
18
18.5
19
US
D c
en
ts/l
b
610
615
620
625
630
635
640
645
650
Ag
ricu
ltu
re A
gg
reg
ate
Ind
ex
Sugar
Agriculture Aggregate Index
01−Mar 19−Mar 06−Apr 24−Apr 12−May 31−May760
770
780
790
800
810
820
830
Pa
lm O
il (
US
D/M
T)
13.5
14
14.5
15
15.5
So
yb
ea
n O
il (
US
D/B
sh)
Palm & Soybean Oil
Soybean Oil
Evolution of highly traded commodities in March 2013. MTM Change and Percentage Volatilities. US $ and US c indicate United States Dol-lar 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: DatastreamPage 14
help further trim stocks. Charts showed palm oil liable
to rise into a higher range.
Sources: OPEC, Reuters, Bloomberg, Financial Times
GCC
Following the reversal in benchmark bonds, the GCC
market fell harshly back in May, and spreads widened
across sovereign CDSs. The high volatility and
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
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
been firm as borrowers sought to take advantage of
the low-yield environment, and overall sentiment
remained positive despite signs of volume dropping
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,
the problems of Egypt could only be reflected further
in an aggravated downturn for its international bonds
during the month. Yields climbed in excess of 100
basis points (bps), and five-year CDS spreads widened
37bps to 620. Egypt remains considered the most risky
investment in the Mena region. With the country’s
annual budget deficit heading for 11-12% of GDP at
the calendar half-year point, $2.7bn of euro notes
were sold late in May, due 2014, from a $12bn EMTN
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
political support necessary to implement reforms that
would face resistance from the impoverished among
the population.
Malaysia / Far East
Confidence returned to Malaysian markets in May
once the possibility of a political earthquake was
removed, with the re-election of PM Razak’s Barisan
Nasional party alliance with 60% of parliamentary
seats. While Asian markets and currencies generally
01−Mar 19−Mar 06−Apr 24−Apr 12−May 31−May3.3
3.35
3.4
3.45
3.5
3.55
3.6
3.65
3.7
Yie
ld t
o M
atu
rity
(%
)
138
138.5
139
139.5
140
140.5
141
141.5
142
Bo
nd
Ind
ex
Bahrain Bond Yields & Prices
01−Mar 19−Mar 06−Apr 24−Apr 12−May 31−May7
7.5
8
8.5
9
Yie
ld t
o M
atu
rity
(%
)
190
195
200
205
210
215
220Egypt Bond Yields & Prices
Bo
nd
Ind
ex
01−Mar 19−Mar 06−Apr 24−Apr 12−May 31−May1.65
1.7
1.75
1.8
1.85
Yie
ld t
o M
atu
rity
(%
)
275
275.5
276
276.5
277
277.5
278
278.5
279Malaysia Bond Yields & Prices
Bo
nd
Ind
ex
Bonds and CDS markets
were upset by the Fed’s seeming change of emphasis
on its stimulus programme, Malaysia outperformed on
the basis of its sustained current account surplus, likely
ringgit appreciation according to consensus forecasts,
and returning attention to the government’s $444bn
investment programme in pursuit of developed-nation
status. Economic growth is due to exceed 5% this
year, and FX reserves are at their highest since 2008.
Page 15
Credit Default Swap Markets
Sovereign Bond Markets
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.
Evolution of CDS Spreads in April 2013 relative to the previ-ous month. The index reported here represents the average ba-sis 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.
01−Mar 19−Mar 06−Apr 24−Apr 12−May 31−May1.6
1.7
1.8
1.9
2
2.1
2.2
2.3
2.4
Yie
ld t
o M
atu
rity
(%
)
150
151
152
153
154
155
156
157
158US Bond Yields & Prices
Bo
nd
In
de
x
Across the region, hard-currency debt funds showed
outward flows, while local currency bond flows were
inward, owing to the repatriating switch of portfolios
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
hopes for economic growth. The intrinsic dilemma
of the strategy evidently flashed danger signals for a
country already saddled with very high levels of debt
issuance and servicing obligation.
Sources: Bloomberg, Reuters, Emirates NBD, Invest
AD, Financial Times
Page 16
Islamic Bonds (Sukuk)
Islamic bonds were caught by the sharp reversal in
fixed-income generally on the month, although sukuk
outperformed conventional instruments in secondary
market trading, down 0.83% relative to 1.81%.
Reporting research by KFH, the Kuwait news agency
KUNA cited a continuation nevertheless in the primary
market’s growth momentum, with the addition of
$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)
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
development projects among its 56 member nations.
Saudi Arabian real estate development company Dar
Al Arkanm closed the first tranche of a $750m sukuk
programme, which was some four times oversubscribed,
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
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
01−Mar 19−Mar 06−Apr 24−Apr 12−May 31−May2.8
2.9
3
3.1
3.2
3.3
3.4
3.5
3.6
Yie
ld t
o M
atu
rity
(%
)
99
99.5
100
100.5
101HSBC−NASDAQ Dubai Sukuk Index (SKBI)
Cle
an
Pri
ce
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 ac-cordance with their tradability and non-
tradability in the secondary markets.
Source: HSBC Nasdaq Dubai
Page 17
01−Mar 19−Mar 06−Apr 24−Apr 12−May 31−May3.6
3.65
3.7
3.75
3.8
3.85
3.9
3.95
4
Yie
ld t
o M
atu
rity
(%
)
105
105.5
106
106.5
107
107.5
108Middle−East Conventional Bond Index (MEBI)
Cle
an
Pri
ce
Source: HSBC Nasdaq Dubai
Accountancy Issues, Rules and Regulations
Qatar Central Bank tightens banks’ securities
investments
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 Bahrain-
based International Islamic Financial Market
(IIFM), a non-profit industry body which develops
specifications for Islamic finance contracts. The
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.
Page 18
Perspective
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
exceptional risk-on/risk-off aspect to market behaviour
since the global financial crisis, also with leading
governments committed to keeping interest rates very
low, so that returns to cash are negative in real terms.
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
indebtedness, and (b) the fact that QE has deliberately
stoked the greenback’s availability. The word irony
might have been invented for that outcome.
By comparison, the euro has held steady in the face
of the dramas and dilemmas blocking its path. Yet,
the European Central Bank has not indulged in QE
in the same way as the US, so purely on a supply
and demand basis it should probably be higher. It’s
just that the US is demonstrating greater growth
opportunities.
Similarly, the yen for some years maintained a
strength, even safe-haven status, despite a relatively
moribund economy and its use by FX traders for carry-
trade purposes. Yet the government has succumbed
to the idea that Japan’s difficulties should be solved
by a starburst of cyclical demand management, rather
than a concerted unpicking of its supply structures. So
the dollar has broken through Yen100.
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.
Even the shale phenomenon can arguably be viewed
in a structural sense rather than interpreted as just a
windfall. Other countries and continents have been
thoroughly blessed with huge mineral resources that
could be exploited properly for the broader benefit, but
have fallen victim to unhelpful political and economic
realities applying in those regions.
In the US it is noticeable that shale’s prospects rely
significantly on the prospectors themselves and what is
actually their private property underground. Doubtless
it helps to have a lot of land – but America is not alone
in that respect.
Developing nations may present outstanding growth
opportunities by way of their emergence into the
market light or the successful development of their
endowments, but prolonged credibility requires a track
record of constant economic renewal upon a platform
of legal and political reliability.
The US undoubtedly has many enough problems of its
own. But when there are few rivals offering convincing
counterparts to its proven precedents, then the dollar’s
longevity, liquidity, a highly-developed economic
and financial system and underlying commitment to
markets and capitalism obviously go a very long way in
the minds of investors.
The importance of being the dollar, and what it represents
by Andrew Shouler
Page 19
Research Team
Gerry [email protected]
Vasileios [email protected]
Rhea [email protected]
Marwa El [email protected]
Marwan IzzeldinDirector
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.
Andrew ShoulerEditor
