Jordan is set for long-awaited sukuk debut. Oliver Cornock, regional editor at the Oxford Business Group, writes.

Central Bank of Jordan (CBJ) Deputy Governor Adel Sharkas has ended months of speculation by confirming that the Kingdom plans to raise in excess of half a billion dollars when it sells its first-ever Islamic bonds, or sukuk, in February.


Sharkas, who made the comments during a speech to open a training workshop at the beginning of January, said the debt would be issued in JDs and was expected to be purchased primarily by local Islamic banks. The sale is expected to raise between JD400 million and JD500 million, he added, with the proceeds financing both existing public debt and new deficit spending at government departments.  


The move appears to offer several potential advantages for Jordan, whose economy and public finances are still recovering from the lingering effects of the 2008-2009 global financial crisis, even as it struggles to care for at least 640,000 refugees from the war in next-door Syria.


For one thing, by keeping the transaction on the domestic level and under Islamic financing rules, the Kingdom may be able to sidestep some of the negative consequences of its credit profile. Standard & Poor’s currently rates Jordanian sovereign debt at BB-, three full steps below “investment” grade, so tapping local sources might help avoid some of the added costs and requirements that rating would incur on conventional international capital markets. 


For another, denominating the issue in JDs would both tend to strengthen the local currency and add no new obligations payable in the Kingdom’s foreign reserves. As of August 2014, the latter stood at what the International Monetary Fund (IMF) has described as a “comfortable” $17.5 billion, but they dipped below $7 billion as recently as end-2012, so protecting these gains has to remain a top priority. 


Local Diversification

In addition, going the sukuk route diversifies the Kingdom’s sources of funding, the need for which has been made abundantly clear in recent weeks. Both the overall recovery and the currency turnaround have been enabled by several factors, including advice and funding from the IMF, previous bond issues in both dollars and euros (some guaranteed by the US government) and a $2 billion grant from the six-country Gulf Cooperation Council (GCC) led by Saudi Arabia. However, tumbling oil prices have sharply reduced revenue forecasts for the Saudis and other GCC crude exporters, potentially reducing the resources they can spare – in aid, soft loans or investment – for their Jordanian ally, who in 2015 faces some $6 billion in maturing debt.


On the other hand, Jordan imports virtually all of its energy needs, so the same lower oil prices mean less pressure on all aspects of public finances, especially the loss-making National Electric Power Co. (NEPCO). Government transfers to the utility – to make up both operational losses and the cost of debt servicing – have totalled as much as 5.5% of GDP in recent years. While NEPCO’s position is now improving thanks to extra investment, sounder planning and a more diverse energy basket, it will be years before all of the new domestic power sources (including renewables, oil shale and nuclear) come online. In the meantime, savings on oil and gas imports should help ease the transition as reliance on hydrocarbons recedes.      


Sharkas also addressed the energy sector in his remarks, predicting that while an average oil price of $60 a barrel would cut annual fuel tax revenues by JD76 million, it also would significantly reduce the state’s financing needs – and allow the government to save a further JD180 million by removing more subsidies. Just a few days after his speech, Brent crude was trading for $50, and some analysts were expecting it to hit $40 in the coming weeks.    


Sukuk and other forms of Islamic financing replace the charging of interest, which is forbidden by Sharia law, with a sharing of risks and rewards. This allows Islamic banks to offer equivalents of virtually all of the products and services common to commercial banks – including packages structured according to the needs of particular fields such as agriculture or construction – but to act more like partners than creditors. 


Jordan passed legislation allowing the state to issue Islamic bonds in 2012, but previously existing regulations impeded the asset transfers required to underpin them, so new laws were drawn up in mid-2014. Since then, observers have been wondering whether and when Amman would avail itself of the sukuk option, with some arguing that it was better to keep seeking concessionary loans and other forms of assistance from friendly governments and multilateral institutions. With the oil slide expected to place significant pressure on the balance sheets of many partner nations, however, such objections seem to have lost whatever weight they might have had.    


Calling The Faithful

Although centuries-old, Islamic finance has undergone a remarkable resurgence in recent years as new product features and greater awareness make the practice more attractive for an increasingly wide variety of customers. According to a study released by Thomson Reuters in December, global outstanding sukuk presently add up to some $241 billion, and with almost half of that ($119 billion) having been issued in 2014, industry insiders expect the figure to rise to more than $900 billion by 2020.

Jordan’s Islamic banking sector dates back to 1978, and the four entrants market a broad selection of financial products and services. However, only one sukuk deal has gone to market, a seven-year JD85 million note issued by Al-Rahji Cement in 2011. Sharkas said that in addition to shoring up the public purse, the upcoming sovereign transaction would benefit Islamic banks by helping the sector to dispose of some of its surplus liquidity, which he put at JD1.4 billion. 


Some industry watchers see potential for a successful government sukuk program to have an even greater impact in the long term; if the state’s move increases awareness and encourages corporate issuers to avail themselves of similar facilities, the private sector may be soaking up the excess cash of local Islamic financial institutions for years to come. As of 2013, the CBJ estimates that Islamic banks accounted for 17% of the entire banking industry’s surplus liquidity, so the effects would be considerable – even more so because access to credit is one of the greatest hurdles facing the Kingdom’s business community.     

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