Sudan is selling Islamic bonds to local banks after attempts to issue global notes this year failed on investor concern over the country’s conflict in Darfur and a possible breakup after more than two decades of civil war.
The government is selling 800 million Sudanese pounds ($336 million) of seven-year sukuk this week to complete plans to raise 1.89 billion pounds, said Azhari Eltayeb Elfaki, general manager of the Sudan Financial Services Co., 99 percent-owned by the central bank, in an interview in Khartoum Dec. 13. Faisal Islamic Bank (Sudan), Sudan’s oldest Shariah-compliant lender, and Financial Investment Bank are among lenders that bought 570 million pounds of a second portion this week, he said.
Sudan, which needs funds to bridge its budget gap and diversify the economy, has been classified by the U.S. as a sponsor of terrorism and been subject to economic sanctions since 1997. Sub-Saharan Africa’s third-largest oil exporter is facing dissolution next month as the south, which accounts for as much as 80 percent of the nation’s oil output, prepares to vote on a referendum to secede from the north.
Sudan’s difficulty in selling bonds outside is “aggravated by the fact that it has high political risk associated with Darfur and its incumbent president,” said Sergey Dergachev, who helps manage the equivalent of $8.5 billion in emerging-market debt at Union Investment in Frankfurt, in an e-mailed response to questions on Dec. 13. Sudan has “a very low level of transparency and it is extremely tough to get reliable and useful information to assess the macroeconomic, and the external and public debt situation,” he said.
The International Criminal Court has issued arrest warrants for Sudanese President Umar al-Bashir on allegations of genocide, crimes against humanity and war crimes in Sudan’s western Darfur region.
Growth in the $65.9 billion economy will accelerate to 5.5 percent this year and 6.2 percent in 2011, from 4.5 percent last year, the International Monetary Fund said in its October Regional Economic Outlook report. The government is targeting 5 percent economic growth next year, Finance Minister Ali Mahmoud Abdel Rasoul said Nov. 10 in Omdurman, a suburb of Khartoum.
The budget deficit may narrow to 3.2 percent of gross domestic product in 2011, Abdel Rasoul said. Central Bank Governor Sabir Hassan estimated in November 2009 a shortfall of 4.9 percent for this year. The government plans to fund with domestic borrowing including sales of Islamic bonds, and from external loans of 4.4 billion Sudanese pounds from such nations as China, Arab states and India, he said.
Overseas borrowings stood at $35.7 billion in 2009, with more than $30 billion in “arrears,” or past due dates, the World Bank and the IMF said in a statement on Dec. 13.
The government raised 500 million Sudanese pounds from the sale of seven-year sukuk last month, Elfaki said, adding that overseas investors bought 12.5 percent of the offering. The final 800-million Sudanese-pound portion will close Dec. 20, he said.
The notes, which comply with the religion’s ban on interest, will pay a return of 14 percent annually, said Khartoum-based Osama Al-Nour Mohamed, the head of research and statistics at Sudan Financial Services. The firm is selling the debt for the government.
Calls to Faisal Islamic Bank’s office in Khartoum weren’t answered. Calls to the debt capital markets department at Financial Investment Bank weren’t returned.
The government delayed an overseas sale of $300 million of Islamic bonds originally planned for 2008 because of “political uncertainty,” Hassan said Nov. 3. Sudan isn’t rated by Moody’s Investors Service or Standard & Poor’s, according to data compiled by Bloomberg.
“Sudan is one nation that we don’t consider at all,” Zeid Ayer, who helps manage $1.6 billion of Shariah-compliant assets at CIMB-Principal Islamic Asset Management Sdn. Bhd., said in a telephone interview from Kuala Lumpur Dec. 13. “It’s not investment grade, it isn’t rated, so its debt isn’t something we’d be interested in.”
Southern Sudan is set to vote Jan. 9 on whether to remain united with northern Sudan or form an independent nation. The vote is the centerpiece of a 2005 peace deal that ended a 21- year civil war between the Muslim north and the south, where Christian and traditional beliefs dominate. About 70 percent of Sudan’s 44 million people are Muslim, according to the Central Intelligence Agency World Factbook.
Global sales of Islamic debt declined 28 percent to $14.5 billion so far this year, according to data compiled by Bloomberg.
The spread between the average yield for global sukuk and the London interbank offered rate shrank 47 basis points this month to 313 yesterday, according to the HSBC/NASDAQ Dubai US Dollar Sukuk Index. Shariah-compliant bonds returned 0.8 percent in the period, the data show. Debt in developing markets gained less than 0.1 percent this month, JPMorgan Chase & Co.’s EMBI Global Diversified Index shows.
The extra yield investors demand to hold Dubai’s dollar sukuk rather than Malaysia’s 3.928 percent Islamic note due June 2015 has narrowed 57 basis points to 341 in December, according to data compiled by Bloomberg. The yield on Dubai’s 6.396 percent sukuk maturing in November 2014 was 6.49 percent yesterday, the data show.
The U.S. eased sanctions on Sudan this year, allowing the export of farming equipment to help local food production and to boost the agriculture industry, the U.S. Office of Foreign Assets Control said in a statement Oct. 20.
Sudan has been fighting rebels in Darfur since 2003, when insurgents took up arms, accusing the government of neglecting the region. The conflict has led to the death of as many as 300,000 people and forced about 2.7 million to flee their homes, according to United Nations estimates. The Sudanese government has put the death toll at about 10,000.
If the authorities in Khartoum fail to hold a credible, peaceful referendum, the U.S. could add more sanctions on Sudan and step up international pressure, U.S. Senator John Kerry said Oct. 22. Kerry is a Massachusetts Democrat and chairman of the Senate Foreign Relations Committee.
Sudan relies on oil exports for most of its foreign currency earnings and reserves are estimated by the IMF at $1 billion for 2010. The country produced 490,000 barrels of oil a day in 2009, according to the BP Statistical Review of World Energy.
The government began selling Islamic bonds in 1998, and the financial industry adheres to Shariah-compliant principles, the Sudan Financial Services’ Mohamed said.
“Everything is Islamic, the banking sector and everything,” he said.