Kuwait is planning its first sovereign sukuk issuances, as part of a wider economic reform aimed at reducing reliance on oil.
Since 2005, Kuwait has been well established as an issuer of corporate sukuk. With 15 issuances between 2005 and 2009, the country was swift to embrace the fixed income model. Today, having bounced back from the financial crisis – and two widely publicised sukuk defaults – Kuwait retains a strong position at the vanguard of Islamic finance.
Government bonds, however, are a different matter. Unlike its GCC neighbours, many of which have issued sovereign sukuk, Kuwait has thus far failed to make inroads in this market. It therefore came as a bold turnaround when, in July, Finance Minister Anas al-Saleh announced the country was preparing legislation to facilitate its debut issuances. While he did not state when this might occur, he did describe the new law as “among the priorities of the government”.
At the time of writing, the law is being prepared by the Ministry of Commerce and Industry, with additional regulations submitted to law firms and industry bodies for their feedback.
“It is hoped that the regulations will provide a platform for Kuwait to start competing for a share of the lucrative global sukuk market – a market which has seen approximately $120 billion of sukuk issued annually for each of the last three years,” says Paul McViety, legal director and head of Islamic finance at DLA Piper.
The move comes at a challenging time for Kuwait’s economy. One of the world’s largest oil exporters, containing 10% of the world’s reserves, the country has seen its energy export revenues tumble since mid-2014. Its projected budget deficit for 2015/16 stands at KD 8.18bn ($27bn), nearly half its total spending.
While the finance ministry has pledged to slash unnecessary expenditure, draconian cuts seem unlikely. According to the Chairman of Kuwait Finance House, Hamad al-Marzouq, speaking at the Euromony Conference-Kuwait in September, the government will need to keep up current levels of public spending if it wants to maintain current levels of economic activity. His views were borne out by the interim budget, which showed that capital spending was on the rise, particularly across transport and infrastructure projects.
The government is therefore considering a number of legislative and regulatory changes designed to boost revenues, prop up domestic markets, and reduce dependence on oil. Kuwaiti investors are well-known for their investment activities abroad – not only in the GCC but also in Europe and the United States – but they have historically been less willing to invest in Kuwait itself, hindering the diversification of the economy.
“It is quietly acknowledged that Kuwait has some gaps in its legal and regulatory framework,” says McViety. “However, its regulators and relevant government departments have been working consistently over the last five years to address those gaps in order provide investors with greater confidence and to encourage more domestic and foreign investment within Kuwait.”
The Capital Markets Authority (CMA) has been a key player in this regard. Established in 2010 under the Capital Markets Law, to promote and regulate the country’s capital markets, the CMA aims to create flexible, liquid and vibrant financial markets with a fairer and more efficient governance framework.
Amid these changes, the sovereign sukuk will form an important piece of the puzzle. In 2012, a new Companies Law was introduced, which provided a mandate to the CMA to develop regulations for certain debt capital market instruments. These included Shari’a compliant instruments, with Articles 186 and 199 specifically naming sukuk as an area for development.
According to McViety, the sukuk regulations being drafted will interface fairly well with relevant sections of the Capital Markets Law and the Companies Law. They will also dovetail nicely with existing rules in this area, which cover everything from the issuance of different types of sukuk to disclosure requirements and certificate-holder protections. Overall, it is likely the regulations will be more exhaustive than are typical for sukuk-issuing countries.
“Based upon the consultation draft, it is expected that the regulations will be detailed and comprehensive,” says McViety. “They will be based upon established practices for sukuk issuances, in the GCC and elsewhere, and will contain a balanced set of rules which take into consideration best practice and the nuances of the relevant Islamic structuring techniques. Analysis of how the 2008 financial crisis hit Kuwait would suggest that this can only be a good thing, certainly in the medium to long term.”
Aside from the sovereign sukuk, other proposed economic reforms include a gasoline subsidies reform, a 10% corporate income tax to be implemented in 2017, and the introduction of a value added tax, pending a decision from the GCC. The country also plans to sell dinar-denominated bonds by the end of the year, with borrowing from local and international markets fast coming to be seen as inevitable.
Although the timeline for their issuance is still unclear, it seems evident that the new sukuk will help Kuwait shake up its economic strategy. As the country works hard to reduce its reliance on oil, the prevailing theme is surely ‘watch this space’.
This news piece appears in the October / November 2015 edition of EMEA Finance