LONDON – Kazakhstan is finalizing its debut sukuk which will be issued by the Development Bank of Kazakhstan (DBK) in the Malaysian market. The DBK, which is 100 percent owned by the government of Kazakhstan, is working with HSBC and Royal Bank of Scotland (RBS) to manage the ringgit-denominated issuance which is effectively a quasi-sovereign offering.
According to Timur Omarov, Head of Financial Education at the National Bank of Kazakhstan, the central bank, the decision for DBK to raise funds from the Malaysian market was finalized during the visit of President Nursultan Nazarbayev of Kazakhstan to Malaysia in April 2012 where he had discussions with Malaysian Prime Minister Mohd Najib Abdul Razak.
"The Development Bank of Kazakhstan (DBK)," he said, "has already received approval from the Kazakhstan regulatory side for a foreign issuance, and now they have passed on the documents to the Securities Commission of Malaysia (SC), the securities regulator, for its approval. I believe they’re planning to raise between $200 million-$300 million, but it is going to be in Malaysian ringgit. The DBK has a number of outstanding Eurobonds, and I think the pricing for the proposed sukuk will be something very close to that."
The issue structure will be a Sukuk Al-Ijarah based on a pool of Ijara contracts. The issuance will be listed on Bursa Malaysia and on the Kazakhstan Stock Exchange, which has recently developed the infrastructure to list Islamic financial products such as Ijara and Musharaka Sukuk and investment funds.
"I think this will be a good experience for the Regulator, for the Kazakhstan Stock Exchange, for our participants and the global market participants. Since this will be a quasi-sovereign issuance I hope it will set a good benchmark, which will open the road for other Kazakh issuers wanting to tap the sukuk market," Omaraov added.
The reason for the DBK tapping the Malaysian market instead of issuing a global or even local issuance, Omarov said, is because Malaysia is the most developed sukuk market, more than 60 percent of the sukuk issued globally originating in Malaysia. Kazakhstan also is in need to set a benchmark for corporate issuances to attract new global investors to the country. "If global investors will invest in the DBK Sukuk they will know much more about Kazakhstan and will try to find other opportunities to invest in the country," he added.
Kazakhstan has all the necessary legal and regulatory framework in place for the issuance of sukuk - sovereign or corporate. The two factors currently governing government thinking on the issuance of a sovereign issuance are market conditions and the budget deficit.
Since the current market conditions are not very good because of the high volatility, and the Kazakh budget deficit is very low - roughly 2 percent of GDP, the Kazakh Ministry of Finance maintains that it is not necessary to issue a sukuk now because the country is not in need of raising any funds. In any case, the Government can raise funds locally at very cheap rates.
However, Omaraov noted that sometimes sovereigns should issue bonds or sukuk for benchmark purposes. "That is the thing we are emphasizing to the Ministry of Finance, but they are not convinced that the cost of money raised through a sukuk may be cheaper than for a conventional bond," he stressed.
The last time the Kazakh Ministry of Finance went to the market was in 2003 with a bond issuance, which matured in 2007. Since then the government has not issued any such eurobonds. "I think if the Ministry of Finance does decide to go to the international market to raise funds it may well issue both a conventional eurobond and a sovereign Sukuk," he added.
All three international rating agencies have assigned an investment grade rating to sovereign Kazakhstan - of BBB (Foreign Currency) and BBB+ (Local Currency).
Kazakhstan has been very proactive in introducing enabling legal and regulatory framework for Islamic banking and finance. The Government in March 2012 published a Roadmap for Islamic Finance in Kazakhstan to 2020. – SG