Tuesday, December 23, 2008

On Turkish Treasury issuing sukuks

There is a well-written article in Hurriyet Daily News on the the possibility of the Turkish Treasury issuing sukuks, i.e. Islamic bonds, in 2009. The economics editors asked my two cents before writing the article, and just to help myself think through the issues, I wrote the small piece below. The paragraph before last (starting with "First") complements the Daily News article really well. Note especially that if the relative resilience of sukuk issuance was indeed mainly due to hedge funds, the USD 200bn market the Treasury is counting on may not materialize, at least not by 2010.

I am not an investigative journalist (I am neither investigative nor a journalist), so I really don’t care if the rumor is true or not. But the fact remains that a large external financing gap looms over the Turkish economy. Moreover, the external financing picture is rather uncertain due, mainly, to the indeterminate outlook of corporate borrowing. Turkey is likely to come to an agreement with the IMF early next year and get at least USD 15bn or so, but even that may not lead to sighs of relief from the Treasury and markets, especially if credit woes continue and the US economy is yet to reach its trough.

Given the challenging external financing outlook and looming FX liquidity strains in the economy, it certainly does make sense for the Treasury to borrow as much as it can externally and to introduce new instruments for doing so. Increasing the variety makes more sense if you think global sovereign bond issuance is likely to swell next year, as developed and developing countries alike start enacting expansionary fiscal policies to counter the slowdown in their economies. Among the more exotic instruments out there, sukuks definitely make sense, as they are one of the few areas in finance that have remained relatively unscathed by the crisis, at least until the final quarter of the year. While overall sukuk issuance is lower this year, compared with the same period in 2007, it has managed to remain more resilient than fundraising in conventional bond markets. Moreover, the Treasury is definitely far from clueless on sukuk-financing, as it has, to my knowledge, worked on sukuk-issuance as early as 2003-2004. However, some challenges do remain:

First, other countries have been eager to tap the sukuk market as well. Indonesia will be issuing its first international sukuks in February 2009, while Britain remains committed to become the first Western government to do so. So, Turkey will face competition, not only from established players like Singapore and Malaysia, the world’s largest sukuk insurer, but also from a couple of newcomers like herself. Moreover, in addition to more hungry kids around, the cake itself may become smaller. In fact, hedge funds, which were betting on a revaluation in the Gulf currencies against the dollar, were at least partly behind the strong issuance during the first half of the year, and with them gone, oil prices tumbling, Gulf real estate losing its momentum and global economic crisis deepening, it is not surprising that sukuk issuance has suffered since October. It remains to be seen whether the market can pick up next year.

I wouldn’t expect the Treasury to borrow significantly with sukuks next year. But in the current tough environment, for a country with an external financing gap like Turkey, every penny counts.

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