Prospects brighten for Southeast Asian sukuk market in '09

The outlook for Southeast Asia's Islamic bond market this year is slightly brighter than seen three months ago, helped by funding for government stimulus and hopes for a global economic recovery, a Reuters poll shows.

The region, led by top market Malaysia, is forecast to see at least $5 bn of issuance this year, according to the poll which included bankers and rating agencies, up from the $4 bn estimated in a similar poll in April.

But activity is expected remain subdued near a four-year low hit last year. New Issuance stood at $6.6 billion in 2008, which was the lowest since $5 bn in 2004, according to Islamic Finance Information Service.

"Sukuk issuance is expected to be driven largely by public sector spending programmes as governments attempt to arrest the decline in overall investment, and pump prime their respective economies," said Liza Mohd Noor, chief executive of Malaysia's RAM Ratings.

"Issuance of sukuk by the corporate sector is likely to remain low amid subdued economic activity, investors' weariness and pricing hurdles."

Most sukuk issuers will come from Malaysia, Indonesia and Singapore with infrastructure, financial and energy firms expected to account for most of the issuance, according to the poll.

Still markets will bear the weight of a controversial sukuk ruling by top cleric Sheikh Muhammad Taqi Usmani and prospects of a spike in sukuk defaults due to the global recession, respondents said.

Sheikh Muhammad had ruled in late 2007 that repurchase undertakings -- a pledge found in most Islamic bonds that the borrower would pay back their face value at maturity -- violates the duty to share risk in sukuk mudaraba and musharaka.

Bankers say the impact of the decree still reverberates in sukuk markets as practitioners grapple with how to comply with the ruling to market practice.

A sukuk default by Kuwait's Investment Dar , the first sukuk default in a major public Islamic instrument in the Gulf region, and debt restructuring at Saudi conglomerates Saad [SAADG.UL] and Ahmad Hamad Algosaibi have also cast a pall over Islamic financial markets.

But recent strong demand for Indonesia and Bahrain's sovereign sukuk issuances have fed hopes of a recovery in the global Islamic bond market which is expected to be worth $200 bn by 2010.

"Judging from the response from new issuances in the first half of 2009, the credit markets have begun to normalise and we expect the Islamic finance debt market to begin operating normally by the fourth quarter of 2009," said Helmi Harunarashid, treasury and capital markets general manager at Bahrain's Elaf Bank.

Following are forecasts for expected new Islamic bond issuance in Southeast Asia in 2009:

Bank Islam at least $4 bn

Davide Barzilai (lawyer) less than $3 bn

Elaf Bank at least $7 bn

Malaysian Rating Corp at least $6 bn

OCBC Al-Amin Bank Bhd at least $5 bn

RAM Ratings at least $5 billion

Rasameel Structured Finance at least $4 bn

Rodney Wilson (academic) at least $5 bn

Royal Bank of Scotland at least $5 bn

Standard Chartered Saadiq at least $5 bn

Median at least $5 bn