Plans by the Philippines to sell Islamic bonds could open a new source of financing for the incoming government of Rodrigo Duterte, but its success may depend on how generous Manila is on pricing and Middle East investors’ response to new entrants in the market.
Governments across Asia are increasingly viewing sukuk as a viable funding option, with Hong Kong open to tap the market for a third time while Sri Lanka and the Maldives consider debuts.
The Philippines’ incoming finance minister is looking at raising debt via sukuk and yuan borrowings to diversify its debt profile, but has yet to firm up plans.
A sukuk from these debutante countries could help widen a market that is dominated in Asia by sovereign deals from Malaysia and Indonesia, with Gulf region investors traditionally favouring investment-grade paper from familiar names.
“The Philippines would be a welcome addition to the global sukuk universe, offering another investment grade opportunity with differentiated credit fundamentals from many of the oil exporting sovereigns active today,” said Dino Kronfol, chief investment officer of global sukuk at Franklin Templeton Investments.
Hong Kong’s sukuk drew heavy demand due to its AAA credit rating, though lower commodity prices have impacted investor appetite from oil-dependent economies.
But Sri Lanka and the Philippines are no strangers to sukuk, having discussed the format over the past few years and investor appetite remains, said Mohamad Safri Shahul Hamid, deputy chief executive officer of Malaysia’s CIMB Islamic Bank.
“Some Islamic accounts have looked at the Philippines for some time and they would be quick to jump in. Sri Lanka is an interesting play and Middle East investors have asked about them as well.”
Importantly, the Philippines could avoid paying a premium for sukuk given it is a recurrent bond issuer, emulating dual issuers like Turkey and Indonesia that have priced their sukuk within or below their conventional curves, he added.
In February, the Philippines sold $2 billion worth of dollar-denominated bonds at a record low rate of 3.7 percent. The 25-year bond attracted orders in excess of $8 billion.
The sukuk market could benefit from new names: Year-to-date issuance totals $27.9 billion through 254 deals globally, down from $33.7 billion through 310 deals a year earlier, according to Zawya, a Thomson Reuters company.
The Duterte government would have to work on a legal framework to facilitate sukuk, which could prove difficult in a busy agenda for the incoming government, said Vicky Muenzer-Jones, partner in the Singapore office of Norton Rose Fulbright.
“Besides regulatory issues, the government will also have to decide what structure works best.”
Despite such concerns, interest is growing in the region to use sukuk for infrastructure financing, said Ashraf Mohammed, Assistant General Counsel and Practice Leader of Islamic Finance at the Asian Development Bank.
There are also new laws being drafted that would help promote Islamic finance domestically and this would further encourage sukuk issuance, said Mohammed.
“A bill put forward in the last assembly, before the elections, is expected to be tabled again in the new assembly.”