Yemen Plans First Sukuk Offering to Fund Budget Deficit
Yemen, the poorest country in the Middle East, plans to sell $500 million of local currency Islamic bonds for the first time to fund the budget deficit and spur the Shariah-compliant finance industry.
The central bank may offer sukuk in the domestic market from the first quarter, Deputy Finance Minister Jalal Yaqoub said in a telephone interview Dec. 29 from Sanaa, the capital. The government is seeking technical assistance on the sale from the International Monetary Fund.Tadhamon International Islamic Bank, the largest Islamic bank in Yemen, and Cooperative & Agricultural Credit Bank said they will participate in the sale.
“The issuance of the sukuk will create investment opportunities and diversify banks’ portfolios, both Islamic and conventional banks,” Masood Ahmed, director of the IMF’s Middle East and Central Asia Department, said in a telephone interview from Washington Jan. 4. “It will help the government to diversify the sources of budget financing.”
Yemen, which is battling al-Qaeda, an uprising in the north and a secessionist movement in the south, needs funds to bridge its fiscal gap, the biggest on the Arabian Peninsula. Muslims make up the majority of the population of 23.5 million, according to the Central Intelligence Agency World Factbook. Growth in the $30 billion economy will slow to 4.1 percent this year, from 8 percent in 2010, the IMF said in its October Regional Economic Outlook report.
Financing Deficits
The government’s 1.84 trillion-rial ($8.6 billion) budget for 2011 forecasts a deficit of 316.4 billion rials, state-run news agency Saba said Dec. 29. The government plans to fund the gap through domestic borrowing including sales of Islamic bonds and from external loans such as a three-year, $369.8-million credit facility from the IMF, according to the organization.
Foreign debt rose to $6.49 billion last September from about $6 billion a year earlier, Saba news agency reported Dec. 29, citing a central bank report. Yemen received a total of $808 million in loans from the Arab Monetary Fund, a unit of the 22- member Arab League, the fund said Dec. 26 on its website.
Yemen’s proposed Islamic notes will target individual investors and local banks, the Finance Ministry’s Yaqoub said. The government will determine sale details by the end of the first week of February, he said. The central bank currently sells 91-day, 182-day and 364-day treasury bills, according to data on its website.
Savings
“Yemeni citizens have a reasonable amount of savings, but the funds haven’t been used in projects,” Yaqoub said. “We want the savings that go to the Islamic banks to go to big development projects like electricity, roads, water and schools.”
Other governments are also seeking to benefit from growing interest in Islamic finance.Afghanistan drafted an Islamic banking law to permit standalone Shariah-compliant banks,Sudan sold Islamic bonds to local banks last month and the Palestinian Authority plans to sell its first sukuk this year. Global assets held by Islamic financial institutions may climb to $1.6 trillion in 2012 from about $1 trillion, the body said in April.
Shariah-compliant bonds returned 12.8 percent last year, the HSBC/NASDAQ Dubai US Dollar Sukuk Index shows. Debt in emerging markets gained 12.2 percent, according to JPMorgan Chase & Co.’s EMBI Global Diversified Index.
Global sales of sukuk, which pay returns based on asset flows, dropped 15 percent to $17.1 billion in 2010, according to data compiled by Bloomberg.
Sukuk Investments
The yield on Malaysia’s 3.928 percent Islamic note due June 2015 fell 9 basis points to 3.02 percent today, according to Royal Bank of Scotland Plc prices. The extra yield investors demand to hold Dubai’s government sukuk rather than Malaysia’s was little changed at 319 basis points, according to data compiled by Bloomberg.
The difference between the average yield for emerging market sukuk and the London interbank offered rate narrowed six basis points to 284 yesterday, according to the HSBC/NASDAQ Dubai US Dollar Sukuk Index.
Yemen has 17 banks, including three Islamic banks, Saba Islamic Bank, Tadhamon International Islamic Bank and Islamic Bank of Yemen for Finance and Investment, according to central bank data. Islamic banks in the country have “ample liquidity for an instrument like a sukuk,” which will help spur demand, the IMF’s Ahmed said.
Needing Sukuk
Sanaa-based Cooperative & Agricultural Credit Bank will buy the bonds to diversify holdings, economic and investment adviser Moneer Saif said in a telephone interview Jan. 5 from the capital. The bank’s Shariah-compliant unit CAC Islamic is seeking a license from the central bank, he said.
“Of course we will buy,” Saif said. “It will be one of our priorities. Islamic banks need Islamic products as an alternative to achieve good profits and compete with conventional banks.”
Oil accounts for 60 percent of government revenue and 90 percent of exports, the IMF said in a report on Aug. 19. Oil reserves are expected to be depleted within a decade, the Washington-based lender said.
U.S. pressure on Yemen to crack down on al-Qaeda has intensified since the local wing of the group claimed responsibility for a failed attempt to blow up a U.S. airliner on Dec. 25, 2009. In October, two parcel bombs sent from the country to U.S. synagogues were seized in the U.K. and Dubai.
The country’s economic “challenges are compounded by a difficult security situation and civil unrest, a rapidly growing population, poor infrastructure, and weak institutional capacity,” the IMF said.
‘Failure’
The government’s plan to finance infrastructure with Shariah-compliant funds may not succeed because existing electricity and water projects are “already a failure,” Rasheed al-Sakkaf, head of treasury at Tadhamon International Islamic Bank, said in a telephone interview Jan. 3.
Al-Sakkaf said his bank would only buy if the project is economically viable. “If the profit is good, we will buy more.”
Islamic bonds are typically backed by assets or cash flow because of the ban on interest. Investors earn any profit from the assets instead.
Yemen delayed the sukuk sale from last year because the government had difficulties “getting well-skilled staff to run the sukuk project,” Yaqoub said.
The 15 percent increase in oil prices last year, economic growth and a recovery in the rial have set the stage for a sukuk offering this year, the IMF’s Ahmed said. The currency has gained 12 percent since reaching a 2010 low of 239.98 on Aug. 4, according to data compiled by Bloomberg.
“The conditions should be there for them to be able to diversify their domestic debt instruments by introducing their sukuk in the market,” he said.
Source: http://www.bloomberg.com/news/2011-01-05/yemen-plans-first-sukuk-offering-to-fund-budget-deficit-islamic-finance.html
To contact the reporter on this story: Dana El Baltaji in Dubai delbaltaji@bloomberg.net
To contact the editor responsible for this story: Claudia Maedler at cmaedler@bloomberg.net
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