NCB Chief Economist Dr. Jarmo Kotilaine was a key speaker at the two-day World Islamic Funds Conference concluded on Tuesday in Manama, addressing an international audience of investment bankers, prominent investors and other leaders of the financial world on the subject ‘the global and regional economic outlook: assessing the impact on the performance of Islamic funds.’
“Increasing private sector activity driving revival in GCC sukuk market, while Islamic financing is gaining prominence in non-Islamic countries,” he said
NCB Capital, Saudi Arabia’s largest investment bank and leading GCC wealth manager, is the Asset Management Partner of this year’s World Islamic Funds Conference.
“While the global economic crisis negatively impacted the Islamic banking sector after growing at double-digit pace for a number of years, resulting in Islamic banking assets slowing down to 9.8% in 2009, growth accelerated again to 26% in 2010 and the interest for Islamic finance continues to grow even in non-Islamic countries as reflected by the fact that there are over 300 Islamic financial institutions worldwide across 75 countries,” he said.
Discussing sukuk, Dr. Kotilaine reported that the sukuk market proved resilient in the face of the crisis, stating that globally, funds raised through sukuk issues grew from $2.8 billion in 2001 to $53.2 billion in 2010 and even during the tumultuous period of 2008-2009 funds raised from sukuk increased significantly.
“Sukuk are also emerging as a new asset class for investors, since asset-backed instruments provide relative capital protection and predictable returns to investors, while In addition, a near-absence of long term financing tools and a growing importance of long term capital projects launched in the region have also increased the attractiveness of sukuk.
“After a brief setback in 2010, increasing private sector activity is driving the revival in the GCC sukuk market. Funds raised through sukuk in the GCC in 2011 reached 38% equal to $17 billion of global issuance up to September 2011, compared to only 28% equal to $7.6 billion and 22% equal $6.1 billion in 2009 and 2010 respectively. Corporate issuance of sukuk in 2011 accounted for around 87% $14.6 billion of total issuance compared to 77% $4.6 billion of total issue in 2010.”
Dr. Kotilaine said that Islamic finance is gaining prominence in non-Islamic countries. In the UK, the government has set an objective to make London the hub for Islamic finance and there are plans to issue sovereign sukuk and amend tax laws on IF. France, Germany, Japan, Singapore and South Korea are other countries where the governments are taking active steps to promote Islamic banking and finance, while Hong Kong aims to become the Islamic finance gateway to China.
Looking at the prospects of global economic recovery, Dr. Kotilaine commented that economic slowdown in the US; inflationary shocks in Asia and sovereign debt in the EU all remain a core risk to the global recovery.
“After growing by a dismal 0.4% in Q1, the US economy grew by 1.0% in 2Q11 while the unemployment rate remained over 9% during this period. Also, the ratings downgrade by S&P hit the country’s credibility in the international markets. Furthermore, the IMF in its June 2011 report revised the US economic growth forecast downward to 2.2% from its previous projection of 2.4% for 2011. Over the long term, with US public debt close to 100% of GDP mark, substantial increase in the rate of fiscal tightening in coming years is more likely.
“Sovereign debt concerns along with faltering recovery clouds the EU economic outlook,” said Dr. Kotilaine. “Germany, the largest economy in the EU region slowed down during 2Q to only 0.1% QoQ largely due to a decline in household spending and higher imports. In France, economic activity stagnated with real output witnessing no growth during 2Q, while the Spanish economy contracted by 0.2% in the same period. Overall, lack of confidence in the Euro-zone’s ability to effectively manage the sovereign debt concerns continues to hurt investor sentiments.”
Dr. Kotilaine said that although their growth rate is nearly twice the pace of their industrialized world counterparts, they are facing increasing inflationary pressure.
“While emerging market central banks continue to raise interest rates, inflation remains at elevated levels – the CPI interest rate in China was 6.2% in August while the WPI inflation in India continues to hover near the 10% mark. Money tightening along with sluggish recovery in the West will likely have a negative impact on the emerging markets’ economic growth.
“Even though the IMF revised its growth projection for the emerging economies to 6.6% from the earlier 6.5% for 2011, growth will likely slow down on account of emerging global pressure.”
“Coming on top of the global economic downturn, political unrest has shaken investor confidence in the Middle East and all GCC exchange indices lost ground during the first half of the year with the index declines ranging from 0.6% in Abu Dhabi and 0.7% in Saudi Arabia to 10.7% in Kuwait and 12.4% in Oman. In total, the regional bourses shed $33.4 billion of their aggregate capitalization during the first six months of the year with the Kuwait Stock exchange accounting for the lion’s share of this as the result of a 13.4% drop amounting to $17.7 billion. In contrast, Saudi Arabia and Qatar were the most resilient markets, falling by 0.4% and 1.3% respectively.
“After remaining depressed for much of 2010, credit off-take finally improved in some GCC countries. Annual credit off-take in Saudi Arabia increased 7.2% during June while that in Oman and Qatar surged 12.6% and 14.7% respectively in the same period.
“The GCC has up to $1.5 trillion worth of projects in the pipeline over the next 5 to 7 years driven by favorable demography and infrastructure development needs. The construction sector, which has doubled since 2000, is expected to account for 66% of total GCC project spending in coming years at $1 trillion followed by the hydrocarbon sector. This is likely to result in increased private sector activity in the near to medium term.”
Dr. Kotilaine observed that the region’s “safe” countries including Saudi Arabia, Qatar and the Emirate of Abu Dhabi continue to enjoy favorable reading among the investor class as reflected from low CDS spreads.