Published: November 5, 2015
The sovereign looks to begin funding in sukuk as part of wider economic reform and to make use of its local expertise.
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 sukuk, 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. Therefore, it came as a bold turnabout when, in July, finance minister Anas al-Saleh announced that 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”.
The legislation to allow sukuk issuance by the Kuwaiti government 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 US$120bn 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, which is one of the world’s largest oil exporters and has ten percent of the world’s reserves. With the dramatic decline in global oil prices, the country has seen its energy export revenues tumble. The projected budget deficit for fiscal year 2015-2016 currently stands at KD8.18bn (US$27bn), equivalent to nearly half its total spending. Having another funding channel, while not essential, is still a prudent initiative, and one that will delight some of the country’s banks, several of whom have global reputations as leaders in Islamic finance and have themselves both issued sukuk and led sukuk issuance for others.
Think global, invest local
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 a finance conference in 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 to provide investors with greater confidence and to encourage more domestic and foreign investment within Kuwait.”