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Sovereign Domestic Sukuk Proliferate as an Important Part of Covid-19 Mitigation Financing Packages with Turkey, Indonesia and Pakistan Leading the Way

It is not only Saudi Arabia that is turning to domestic sovereign Sukuk issuances as part of a diversified public debt raising strategy in an effort to mitigate the twin impacts of the Covid-19 pandemic and the sharp decline in global commodity prices especially crude oil on the global and national economies.

A diversified public debt raising strategy in the context of the above countries generally comprises raising funds from the financial markets through increased domestic and international Sukuk issuances in addition to international conventional bonds, drawing on sovereign wealth fund (SWF) assets and through alternative financing. 

The governments of Turkey, Indonesia, Bahrain, Kuwait, Pakistan and Nigeria have all been active in the domestic Sukuk market in the first four months of 2020, and in the case of Indonesia, Jakarta even changed the law in April 2020 to enable the Bank of Indonesia (the central bank) to purchase an entire auction of Sharia’a debt securities. Of the regular issuers of domestic Sukuk, only the Central Bank of Qatar has been absent from the market preferring to auction monthly Treasury Bills in the First Quarter of 2020 and drawing down on its SWF assets.

The Turkish Ministry of Finance & Treasury raised TL7,200.66 million (US$1,028.76 million) through four monthly auctions of lease certificates (Sukuk Ijara), the latest one being a 5-year TL1.47 billion Sukuk Ijara issuance on 8 April priced at a rental rate of 1.7% on a 6-month rental payment period.

Similarly, the Debt Office of the Turkish Ministry of Finance & Treasury issued Gold-backed Lease Certificates (Sukuk Ijara) in three auctions in February, March and April 2020, collecting 28,831,120 grams of gold (1000/1000 purity) from institutional investors for issuance of an aggregate 28,831,120 gold lease certificates (at a nominal value). The lease certificates were issued by Hazine Mustesarligi Varlik Kiralama A.S., a wholly-owned special purpose vehicle owned by and on behalf of the Ministry of Finance, the obligor.

The latest auction was on 15 April which resulted in 6,738,140 grams of gold collected and the same amount of gold lease certificates issued at nominal value priced at a lease rate of 0.75% over a 6-month lease period with a tenor of 364 days and maturing on 16 April 2021. The Ministry of Finance issues these gold-backed lease certificates “to diversify borrowing instruments, broaden the investor base and bring the idle gold into the economy.”

According to Finance Minister Berat Albayrak “citizens are provided with a safe investment tool for their gold savings. With the gold bond and gold-denominated lease certificate issuance through five banks, our citizens will both win themselves and contribute to the national economy.”

The investors will be paid TL-denominated returns on a semi-annual bases indexed to the gold price. On maturity, according to the Ministry of Finance, investors may request the principal payment as 1 kilogram of gold bar (produced by refineries) or Republic Gold Quarter Coins printed by the Turkish State Mint.

In addition, the Debt Office also issued FX-denominated lease certificates (Sukuk Ijara) through the Direct Sale Method in the local market for subscription by an approved list of primary dealer banks. On 26 February the Debt Office raised US$1.1 billion in a Sukuk Ijara transaction effected by Hazine Mustesarligi Varlik Kiralama A.S., which had a tenor of 728 days and priced at a lease rate of 1.75% payable over a 6-monthly lease period and a maturity date of 25 February 2022.

In a second offering on 13 March, the Debt Office issued €255.71 million of lease certificates through Hazine Mustesarligi Varlik Kiralama A.S., which had a tenor of 364 days and priced at a lease rate of 0.75% payable over a 6-monthly lease period and a maturity date of 12 March 2021.

In Indonesia, the government amended Law Number 1 of 2020 on State Financial Policy and Stability of Financial Systems in April 2020 to allow the Bank of Indonesia (BoI) to purchase the auction of long-term Government Debt Securities (SUN) and/or Government Islamic Securities (SBSN) in the primary market without going through intermediaries such as brokers or main dealers.  “It is necessary as a funding source for the government to recover the national economy including maintaining state financial management sustainability including SUN and/or SBSN issued in response to COVID-19 pandemic. Purchase of SUN and/or SBSN in the primary market is based on principle that Bank Indonesia is a last resort if the market capacity is unable to purchase them and/or result in high yield increase,” said Onny Widjanarko, Executive Director of the BoI.

“Bank Indonesia will consistently coordinate with the Government, Indonesia Financial Services Authority (OJK), and the relevant authority to monitor COVID-19 pandemic developments in order to take policy measures to mitigate and reduce the impacts on the national economy,” he added.

On 22 April, Jakarta conducted an Additional Auction for Sovereign Sharia Securities (SSS) (Greenshoe Option) specifically for this purpose through the auction system of Bank Indonesia, raising IDR4.02 trillion (four trillion twenty billion rupiah). According to the Directorate of Islamic Financing at the Directorate General of Budget Financing & Risk Management at the Ministry of Finance, the auction was over-subscribed with total incoming bids reaching IDR6.33 trillion. The issuance comprised four tranches maturing in January 2022, October 2024, February 2037 and April 2043, and priced at a coupon rate 5.45%, 6.625%, 6.1% and 6.75% per annum respectively.

Earlier in the month on 7 April 2020, the Indonesian Ministry of Finance raised a further IDR6.29 trillion (six trillion two hundred and ninety billion rupiah) through the sale of SSS through the auction system of Bank Indonesia. That transaction was over-susbscribed to the tune of IDR18.005 trillion (eighteen trillion five billion rupiah). The issuance comprised six tranches maturing in October 2020, January 2021, January 2022, October 2024, February 2037 and April 2043, and priced at a coupon rate at discount, discount, 5.45%, 6.625%, 6.1% and 6.75% per annum respectively.

In Manama in April, the Central Bank of Bahrain (CBB) issued two dinar-denominated Sukuk. These comprised its regular monthly BD43m ($113.72m) Sukuk Al-Salam Islamic Securities on 19 April, which carry a maturity of 91 days, and were oversubscribed to the tune of BD100.272 ($265.18m). The expected profit return on the issue, according to the CBB, is 2.3%. 

The CBB also issued its monthly short-term Islamic leasing certificates, Sukuk Al-Ijarah, totalling BD26m ($68.76m) on 7 April.  They were 184% oversubscribed by local banks and institutions and carry a maturity of 182 days. The expected profit return on the issue is 2.7%. Both the Bai Salam securities and the leasing certificates are issued by the CBB on behalf of the Government of Bahrain.

Similarly, in Kuwait, the Central Bank of Kuwait (CBK) issued three offerings of CBK Certificates and Related Tawarruq (based on Islamic cost-plus commodity financing contracts) in April alone raising KD720m ($2,314.41m) in the process. They include a KD240m ($771.47m) issuance with a 3-month tenor and a 1.25% Rate of Return on 21 April; a KD240m ($771.47m) issuance with a 3-month tenor and a 1.25% Rate of Return on 21 April on 14 April; and a further KD240m ($771.47m) issuance with a 3-month tenor and a 1.375% Rate of Return on 1 April respectively. These are regular monthly issuances.

At the end of March, Moody’s Investors Service put Kuwait’s Aa2 long-term issuer rating on review for downgrade. “The decision to place Kuwait’s issuer rating on review for downgrade reflects the significant decline in government revenues resulting from the sharp decline in oil prices combined with weak governance leading to heightened uncertainty that the government will be able to access sufficient sources of financing at a time when its financing needs have increased significantly,” said Moody’s in its rating action.

Kuwait’s revenue base is nearly entirely reliant on oil, which makes it highly exposed to the collapse in oil prices. The emirate is unique in that parliament gives legal authorisation for the government to issue debt papers. The last Public Debt Law expired in 2017 and parliament has yet to renew the Law. This, says Moody’s, has forced the government to draw down the assets of the General Reserve Fund (GRF) to fund expenditure and service debt obligations. As a result of large and persistent fiscal deficits since the oil price shock in 2015, the GRF has been shrinking rapidly.

According to Moody’s estimates, accelerated drawdowns to meet the much wider borrowing needs would deplete the liquid portion of the GRF before the end of the current fiscal year. Not surprisingly, local bankers stress that the pressure on MPs to renew the law amid the twin COVID-19 crisis and the collapse of oil prices is increasing, albeit this may depend also on whether parliamentary elections due in October this year go ahead or not. Failing that, it could lead to a constitutional crisis given that the ailing Kuwaiti ruler Sheikh Sabah Al-Ahmad Al-Jaber Al-Sabah has the constitutional flexibility to issue an emergency decree permitting debt issuance or the use of the GRF.

The GRF is the smaller stabilization fund which holds part of the sovereign wealth fund assets managed by the Kuwait Investment Authority. These assets totalled $533.65bn in March 2020, of which the GRF accounted for around $489bn, but which apart from the draw down also took significant investment losses in Q1 2020. Kuwait in fact may be on track to issue its debut Sukuk in the international market and more likely through local currency Sukuk.

In Nigeria, government officials confirmed that the federal government is in the process of issuing its third local currency 100 billion naira (N100 billion) Sukuk to finance vital economic sectors, especially road infrastructure. The Debt Management Office (DMO) of the Nigerian Ministry of Finance has already issued two N100 billion Sukuk. A third one was due to be issued last year but that was put on hold. But with the Covid-19 pandemic, the urgency to raise more funds whether through its regular FGN (Federal Government of Nigeria) Eurobonds or additional instruments such as Sukuk and diaspora bonds became more pressing. 

The DMO, in its borrowing plans for 2020, published towards the end of 2019 and based on the New Borrowings in the 2020 Appropriation Acts, which comprises of N850 billon and N744.99 billion for External and Domestic Borrowings respectively, confirmed that “new domestic borrowings will be raised through FGN Bonds, Sukuk, FGN savings Bonds and possibly Green Bonds.”

Similarly, in Pakistan, the State Bank of Pakistan (SBP), the central bank, published its Auction Target Calendar for the sale of 5-Year GOP (Government of Pakistan) Ijara Sukuk Variable Rental Rate (VRR) for the period April-June -2020. The first auction took place on 23 April 2020 with others to follow on 14 May and 18 June, with the aim of raising Rs225 billion in total through Rs75 billion monthly auctions. The auctions, according to the SBP, are aimed at stimulating trading in Sharia’a-compliant debt securities and to help plug the budget gap amid the spread of COVID-19 in the country.

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