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THURSDAY, April 24, 2014
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Kazakhstan is wise to enter the Islamic bond market

News analysis by Martin Sieff
Kazakhstan is wise to enter the Islamic bond market during the countrys recovery

WASHINGTON, DC - Thursday, September 02, 2010 - With oil revenues on the rise and its banking sector making a strong recovery, now may seem a surprising time for Kazakhstan to get into the Islamic bond market.

But coming off the last few years of shaky economic times, Kazakhstan is wise to diversify its revenue sources.

Aibek Bekzhanov, of the Regional Financial Center of Almaty, announced on July 27 that Kazakhstan has decided to make its initial Islamic bond sale before the end of 2010.

Islamic bonds, also called sukuk, are tradable bonds that comply with Islamic prohibitions against collecting or paying interest. They often involve partial ownership in a business or business assets.

The country had been hinting for months that it would enter the Islamic bond market and Bekzhanov’s announcement follows Kazakhstan’s approval this year of the opening of a branch of Abu Dhabi’s Al Hilal Bank in Almaty. The Abu Dhabi-state owned bank is very active in the sukuk market and is projected to funnel $2 billion in investment into the Kazakh economy over the next two years.

The announcement also comes in the midst of Kazakhstan’s strong economic recovery.

One of Kazakhstan’s main economic drivers, oil, appears to be in good shape. Global oil prices remain around a robust $80 a barrel, more than twice their $35-a-barrel levels at the beginning of 2009. And newly-announced Kazakh oil export taxes are expected to generate $1.2 billion this year and $2.4 billion in 2011.

Kazakhstan’s now-third largest bank, BTA, has also announced that it has completed a restructuring that will return it to profitability in 2011.

However, Kazakhstan’s economic planners remain cautious. The global financial crisis nearly wrecked three of the country’s largest banks and led to massive private sector debt rescheduling, shaking national confidence.

And after nearly two decades of 8 percent to 9 percent annual growth, the projected rate for next year is down to 3.1 percent. The country is also contending with a nearly 40 percent drop in this year’s harvest because of the record heat wave and drought sweeping Central Asia.

Therefore, the Kazakhs are motivated to play it safe and seek increased diversification.

Launching the sukuk could tap much more savings from Kazakhstan’s domestic economy. Some 80 percent of its 16 million people are Muslim and the faith has been making major strides in the nearly two decades since independence. The number of mosques in the country has risen from 68 in 1987 to approximately 2,500 today.

The move towards launching a sovereign sukuk must also be seen in the context of Kazakhstan’s new Customs Union with Russia and Kazakhstan’s growing ties with China. Entering the Islamic bond market is a logical next step in Kazakhstan’s trend toward insulating itself from future shocks and volatility in Western financial markets.

Along those lines, an offering would certainly strengthen Kazakhstan’s ties to Malaysia, one of the leading driving forces in the global sukuk movement, and to the oil-rich Arab nations of the Middle East.

Also, next year Kazakhstan will chair the 57-nation Organization of Islamic Countries (OIC). That will give it a global platform as widespread as its chairmanship this year of the Organization for Security and Cooperation in Europe (OSCE).

Launching its first sovereign Islamic bond would be an appropriate way for Kazakhstan to start its year of OIC chairmanship.

Kazakhstan’s Islamic bond issue could also jump-start the global Islamic bond market from its current level of stagnation. Fears of the possibility of war in the Middle East and the 2008-9 global economic crisis combined with some major sukuk defaults in recent years have left the Islamic bond market flat. The market grew by only $1.5 billion this year compared to $23 billion worth of growth in 2009.

Launching an Islamic bond issuance will be substantially more expensive than launching a comparative Eurobond one. But Islamic purchasers of bonds will be less likely to lecture the Kazakhs on a range of issues from human rights and promoting democracy to the environment.

Even if the Kazakhs don’t need to issue their sukuks for purely financial reasons, entering the market now -- during Kazakhstan’s recovery -- to hedge against future uncertainty is a wise move.

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