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Kuala Lumpur. The outlook for Southeast Asia’s Islamic bond market this year is slightly brighter than it was three months ago, helped by funding for government stimulus and hopes for a global economic recovery, a Reuters poll shows.

According to the poll, which included bankers and rating agencies, the region — led by Malaysia — is forecast to see at least $5 billion of issuance this year, up from the $4 billion estimated in a similar poll in April.

But activity is expected remain near a four-year low hit last year. New issuance stood at $6.6 billion in 2008, which was the lowest since $5 billion in 2004, according to the Islamic Finance Information Service.

Sukuk issuance is expected to be driven largely by public-sector spending programs, as governments attempt to arrest the decline in overall investment, and pump prime their respective economies,” said Liza Mohd Noor, chief executive of Malaysia’s RAM Ratings.

“Issuance of sukuk by the corporate sector is likely to remain low amid subdued economic activity, investors’ weariness and pricing hurdles.”

Most sukuk issuers will come from Malaysia, Indonesia and Singapore, with infrastructure, financial and energy firms expected to account for most of the issuance, according to the poll.

Markets will bear the weight of a controversial sukuk ruling by top cleric Sheikh Muhammad Taqi Usmani and prospects of a spike in sukuk defaults due to the global recession, respondents also said.

Sheikh Muhammad ruled in late 2007 that repurchase undertakings — a pledge found in most Islamic bonds that the borrower would pay back their face value at maturity — violated the duty to share risk in sukuk mudaraba and musharaka.

Bankers say the impact of the decree still reverberates in sukuk markets, as practitioners grapple with how to comply with the ruling to market practice.

A sukuk default by Kuwait’s Investment Dar, the first sukuk default in a major public Islamic instrument in the Gulf region, as well as debt restructuring at Saudi conglomerates Saad and Ahmad Hamad Algosaibi, have also cast a pall over Islamic financial markets.

However, recent strong demand for sovereign sukuk issuances by Indonesia and Bahrain have fed hopes of a rebound in the global Islamic bond market, which is expected to be worth approximately $200 billion by 2010.



Reuters