JEDDAH: Saudi Arabia may overtake Malaysia as the largest issuer of Islamic bonds for the first time in 2011 as the Kingdom's SR1.44 trillion ($384 billion) stimulus plan boosts spending. Economic growth in Saudi Arabia will accelerate to 4.5 percent in 2011 from 3.4 percent this year, the International Monetary Fund said in its World Economic Outlook report in October. The Kingdom, which holds 20 percent of the world's proven oil reserves, is rated Aa3 by Moody's Investors Service and AA- by Standard & Poor's, the fourth-highest ratings. Sales of Islamic bonds from six issuers in the six-nation Gulf Cooperation Council dropped 32 percent to $4.5 billion in 2010, the least since 2005, after debt restructurings, defaults and tumbling property prices hurt investors' confidence. Saudi Electricity Co., the Arab world's largest utility by market value, will finance more than SR30 billion ($8 billion) of projects, chief executive officer Ali Al-Barrak said in an interview. Saudi International Petrochemical Co. said it may sell as much as SR2 billion of Shariah-compliant debt in the first quarter. Sukuk from borrowers in the largest Arab economy totaled $2.3 billion this year, compared with $7.3 billion of local-currency debt sales in Malaysia, data compiled by Bloomberg show. "The Saudi market could easily become the largest Sukuk issuer simply because Saudi Sukuk are much larger," Tariq Al- Rifai, director of Islamic Market Indexes in Dubai for Dow Jones Indexes, part of a joint venture 90 percent owned by CME Group Inc. and 10 percent by News Corp.'s Dow Jones & Co., said. Petrochemical makers in the Gulf will invest $50 billion by 2015 and boost output by 46 percent to 154 million tons annually over the period, Abdulwahab Al-Sadoun, secretary general of the head of the Gulf Petrochemicals & Chemicals Association, said in Dubai recently. Most of the investments are expected to be made in Saudi Arabia, he said. "Saudi utilities and smaller corporates will most likely look at riyal Sukuk, just because the domestic demand is there," said Al-Rifai. The Kingdom announced in August a five-year development plan to spur economic growth, create jobs and diversify its economy away from hydrocarbons. Borrowers from the Kingdom are tapping the Islamic debt market to fund expansion, John Sfakianakis, chief economist at Banque Saudi Fransi in Riyadh, said. Saudi Electricity and Dar Al Arkan Real Estate Development Co., the biggest Saudi developer, led sales of Sukuk from the Gulf this year, according to data compiled by Bloomberg. Saudi Electricity sold SR7 billion of 20-year Islamic bonds in May at 95 basis points more than the three-month Saudi riyal interbank offered rate. Investors placed SR27 billion riyals of bids, the company said. Dar Al Arkan sold $450 million of Sukuk in February. National Commercial Bank will sell its first Sukuk in the second quarter, executive vice president Abdulrazzak Elkhraijy said. Companies in the Kingdom are in a "unique position in raising much more cost competitive capital than anyone else in the region due to the low risk profile of Saudi Arabia," Sfakianakis said. "There is no doubt that 2011 will be a solid year for private-sector growth." The Malaysian government's 10-year initiative for private- led projects ranging from a nuclear power plant to an underground rail network will spur sales of Shariah-compliant debt, Kuala Lumpur-based RHB Investment Management Sdn.'s Chief Executive Officer Sharifatul Hanizah Said Ali said Dec. 15. "There is more demand from local investors for Malaysian ringgit Sukuk than there is local demand for sukuk in the Middle East," Naji Nabaa, a Dubai-based associate director of fixed- income sales for the Middle East and North Africa at Exotix Ltd., an investment bank specializing in infrequently traded assets, said Sunday. "Malaysia will continue to dominate the Sukuk market in 2011 in terms of the number of Islamic bonds issued." The extra yield investors demand to hold Dubai's government Sukuk rather than Malaysia's narrowed 46 basis points this month to 344, data compiled by Bloomberg show. The yield on Dubai's 6.396 percent Sukuk maturing in November 2014 dropped 3.6 basis points to 6.54 percent Monday, according to Bloomberg data. Shariah-compliant debt in the GCC returned 12.9 percent this year, HSBC/NASDAQ Dubai GCC US Dollar Sukuk Index shows. Global Sukuk returned 12.2 percent this year, according to the HSBC/NASDAQ Dubai US Dollar Sukuk Index. Bonds in developing markets gained 11.4 percent, JPMorgan Chase & Co.'s EMBI Global Diversified Index shows. The difference between the average yield for emerging market sukuk and the London interbank offered rate narrowed 61 basis points this month to 300 on Dec. 17, according to the HSBC/NASDAQ Dubai US Dollar Sukuk Index. In the GCC, which includes Qatar, the United Arab Emirates and Kuwait, the gap shrank 67 basis points to 372 on Dec. 17. Meanwhile, Kuwait-based Gulf Investment Corporation (GIC) will set up a 3.5 billion ringgit ($1.1 billion) Islamic fund-raising program in Malaysia, a source said Monday. The program will be established in January, after the corporation sold 1 billion ringgit of bonds in the Southeast Asian country in 2008, said the source who asked not to be identified as the plan had not been announced. GIC had no immediate comment. The corporation is among a slew of Gulf issuers who are expected to tap Malaysia's market in the coming months, as Middle Eastern banks and companies look to diversify their sources of funding after the Dubai debt crisis. Dubai is working on plans to issue about $1.5 billion in sovereign Sukuk in Malaysia while National Bank of Abu Dhabi, the UAE's largest lender by market value, launched 500 million ringgit in 10
