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WEALTH MANAGEMENT

Surging Global DebtThe Good, the Bad and the Ugly

ENBD Surging Global Debt 2018 PRINT_Layout 1 03/04/2018 11:05

OPPORTUNITIES TO INSPIRE

Introduction3 10

11

1

Contents

Emirates NBD CIO-Office April 2018

EMIRATES NBD WEALTH MANAGEMENT SURGING GLOBAL DEBT

Economic growth pitted against surgingglobal debt

US MortgagesContinued expansion

National DebtStudent Debt7The printability of moneyA growing concern in the US


Household Debt 13

Negative Yielding Debt 15

Islamic Debt17

Interesting Facts19

Contents

OPPORTUNITIES TO INSPIRE 2Emirates NBD CIO-Office April 2018


Sukuk and the insatiablesearch for Islamic debt

EM nations in better shape than theirDM peers

Has there been a paradigm economic shift?


OPPORTUNITIES TO INSPIRE 3


Introduction: Economic growth pitted against surging global debt


Nearly all fixed income experts andobservers have raised concernsabout the continued expansion ofglobal debt; It is agreed that thisdebt expansion over the pastdecade is what primarily fueledcapital markets and ultimately higherglobal GDP growth. From double-digit yields in the late 90’s to zero-to-negative yields today, the globaldebt situation has changeddrastically and dramatically.

Debt in and of itself is not theproblem. Historically, debt was whatpermitted the rise of globalizationduring the industrial revolution and ittransformed infrastructure projects;in fact, it was necessary to sustainlarge-scale projects. The problem isthat more recently debt was primarilyused to prop-up global capitalmarkets following the financial crisisin 2008. Low borrowing costs haveonly fueled what has become aninsatiable appetite for leverage overequity. While growth does continueto be fueled by debt, recent studieshave shown that the quantum of debtnecessary to maintain feeble growthis becoming unsustainable; as debthas risen, growth has flat lined (seechart 1).

And who is this money owed to?“Us” is the short answer. Everyfinancial liability, which includesdebt, has a corresponding financialasset. And all those financial assetsare ultimately owned by someone.

“Debt is a form of wealth”If you put your money in a bankaccount the bank is likely to loanthe cash out to someone else tobuy a house: your financial assetthus becomes someone else’sfinancial liability.

While some enjoy low borrowingcosts, some nations (as well as afew blue-chip corporations) havethe privilege of “charging money toborrow money”; to the tune of aUSD 10tn peak in 2017.

Risks to global financial stabilityhave declined with synchronisedglobal recovery, but higher debtlevels and leverage in the globaleconomy are more vulnerable andpose significant risks to the globalfinancial system. That said, thebenign macroeconomic environmentand prolonged monetary and fiscalstimulus have provided theimpetus for the abundant liquidityalong with the record-lowborrowing costs.

Risks to the global growth forecastappear broadly balanced togetherwith easier financial conditions.Stretched or rich asset valuationsand very compressed termpremiums raise the possibility ofsome challenges to the financialmarkets, which may dampengrowth and confidence.

233USD

tn

GLOBAL DEBT.....................................

A faster than expected increase incore inflation and interest rates bydeveloped nations could posesignificant risks to many of thetraditional asset classes. Whileliquidity and financial conditionsremain easy, domestic policiesincluding trade, geopoliticaltensions, and changes in thepolitical landscape in manycountries also pose significantdownside risks. The world remains“fragile” and “sensitive” and havenow got accustomed to low volatility.

Growth Rate

Gro

wth

Rat

e %

Median

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

2014

2016

2018 F

2020 F

2022 F

-1

0

1

2

3

4

5

6

Source: IMF estimates as of Dec 2017

Chart 1: Global growth – during the past four decades, growthrates trending towards the longer-term median

> Global debt currently stands at just over USD 233tn

> “Debt is a form of wealth” – surge in debt should translate into global growth

> The ability to service debt with interest rates rising globally is a worry





20071997

US

D T

rillio

n

2017

Non FinancialCorporates

Government Financialsector

Household0

10

20

30

40

50

60

70

80

22

42

68

19

33

63

14

5358

15

34

44

Source: Institute of International Finance (Global debt monitor, 5 Jan 2018)

Chart 2: Composite Breakdown of Global Debt

During the past decade,governments cumulativelyhave raised close to USD30tn of additional debt.






Synchronised Global GrowthApproximately 120 economies thatcontribute to two-thirds of worldGDP have seen a pickup in growthin year-on-year terms in 2017, thebroadest synchronised globalgrowth upsurge since 2010. Thestronger momentum experienced in2017 is expected to carry into 2018and 2019, with global growthrevised to 3.9%.

Of course, this synchronised growthcomes with a synchronised surge indebt levels. Growth has typicallybeen stimulated through excessiveborrowings and credit creation byboth governments and corporations.During the past decade,governments cumulatively raisedclose to USD 30tn of additionaldebt. The access to credit has in

fact led to a surge in household debtlevels. We all live in a worldsurrounded by credit as technologyadvancement takes centre stagemaking it easy for every individualand corporations towards easyaccess to capital.

Sources: IIF, BIS, Haver, National Sources.

Table 1: Total Global Debt by Sector, % GDP

Households Non-Financial Government FinancialCorporates Sector

US 77.23 72.08 99.98 81.44

Euro Area 57.84 102.91 103.87 126.30

Japan 53.95 102.14 221.35 146.21

UK 86.29 84.49 104.25 179.71

China 46.74 163.19 46.46 38.44

India 10.72 45.79 67.7 5.17

Indonesia 16.71 22.34 28.62 7.24

Malaysia 67.08 67.08 52.66 33.09

Turkey 17.64 69.05 28.83 25.71

Russia 16.35 53.38 15.97 12.11

Brazil 21.50 41.21 81.32 35.95

Mexico 17.00 26.48 36.05 15.59

South Africa 34.04 38.46 54.25 22.00

Saudi Arabia 13.88 49.09 15.77 3.84

Egypt 7.52 29.43 100.35 4.50

DevelopedNations

EmergingMarkets


Emerging Market and Developing Economies Advanced Economies

500 750 1,000 1,250 1,500 1,750

1

250 0 0

2

3

4

5

6

7

8

Growth (USDbn)

Western Europe

North America

South America

Southeast Asia

South Asia

East Asia

Middle East

Africa

Gro

wth

(%)

World Avg.

Emerging Markets Avg.

G7 Avg.

Source: IMF estimates as of Q3 2017

Chart 3: Global growth – EM contributes close to two-thirds of Global Growth




Chart 4: Global Debt USD 233tn – Cumulative Debt and Sectoral Breakdown

% o

f GD

P

Non-financial Corporates Households Financial Corporates Government

0

50

100

150

200

250

300

350

1999 2002 2005 2008 2011 2014 2017

Source: Institute of International Finance (Database file: Global debt Monitor data file, 5 Jan 2018)

We all live in a worldsurrounded by credit astechnology advancementtakes centre stage.



Student Debt: A growing concern in the US



The US federal governmentprovides various types of studentloans to help promote access tohigher education. The commonfeature among the different typesof loans is that they allow studentsto obtain financing for highereducations at better terms thanthat available in the private market.In this regard, the federalgovernment subsidises the cost ofloans for the borrower. Studentsusually have little or no credit oremployment history and nocollateral with which to secure aloan to finance a higher education.

In response, the federal studentloan programs entitle virtually allstudents to obtain loans with below-market interest rates and flexiblerepayment options. Furthermore,loans are available to borrowerswithout respect to income, choice ofinstitution, field of study, oracademic performance (except inlimited cases). Loans are availablefor two- and four-year undergraduatestudy, and graduate study. Loansare issued directly by the USDepartment of Education to theinstitutions of higher education thatborrowers attend.

The loans are administered (i.e.serviced) by the Department ofEducation and private companieswith whom the Department hascontracted to process loandisbursements and handle loanrepayments and collections. Theinterest rates on federal loans aretied to the rates on the 10-yearTreasury note, plus a markup, butstill provide better terms than muchof what’s available in the privatemarket. Rates on each loan type arecapped and remain fixed for the lifeof each loan, but reset for the newyear in July.

> The average 2016 college graduate has USD 37,172 in student loans, nearly triple the average twodecades ago

> Student loan debt is over USD 1.48tn and USD 620bn more than the total US credit card debt.

> Student loan delinquency rate of 11.2%

> 44.2mn Americans with student loan debt

The US Department of Education has two federal student loan programs:

The William D. Ford Federal Direct Loan (Direct Loan) Program is the largest federal student loanprogram. Under this program, the U.S. Department of Education is your lender. There are four types ofDirect Loans available:

> Direct Subsidised Loans are loans made to eligible undergraduate students who demonstratefinancial need to help cover the costs of higher education at a college or career school.

> Direct Unsubsidised Loans are loans made to eligible undergraduate, graduate, and professionalstudents, but in this case, the student does not have to demonstrate financial need to be eligible forthe loan.

> Direct PLUS Loans are loans made to graduate or professional students and parents of dependentundergraduate students to help pay for education expenses not covered by other financial aid.

> Direct Consolidation Loans allow you to combine all your eligible federal student loans into asingle loan with a single loan servicer.

The Federal Perkins Loan Program is a school-based loan program for undergraduates and graduatestudents with exceptional financial need. Under this program, the school is lender.

Funding for Perkins loans is provided by the federal government directly to colleges and universities, whichmust match one-third of the funding. The funding establishes a revolving loan fund, from which new loansare made as older loans are repaid. The federal government also provides separate funding to forgivePerkins Loans if borrowers are employed in certain high-need jobs.





Some key findings on student loans in the US:> Approximately USD 1.48tn in total US student loan debt> 44.2mn Americans with student loan debt> The student loan delinquency rate stands at 11.2%> Average monthly student loan payment (for borrower aged 20 to 30 years): USD 351 > Median monthly student loan payment (for borrower aged 20 to 30 years): USD 203

Graduate student loan debt > About 40% of the USD 1tn student loan debt was used to finance graduate and professional degrees.

Demographics: Gender The Prudential student loan surveywas conducted online by ChadwickMartin Bailey on behalf of Prudentialbetween 13 September and 3October 2016. A total of 2,369people completed the survey,including 1,011 current collegestudents and 1,358 graduates.Among current students, 756 hadstudent loans and 255 did not.Among graduates, 801 had studentloans that were not paid off, 300 hadstudent loans that had beensatisfied, and 257 had never usedstudent loans. The sample wasCensus balanced by gender andethnicity within each of these fivegroups. The study was based onstudents and graduates of non-profitcolleges and universities who areworking on or achieved anAssociate’s or Bachelor’s degree;all reported debt figures are basedon undergraduate education only.

Table 2: What are the current interest rates?The interest rates for Direct Subsidised Loans and Direct Unsubsidised Loans are shown in the table below.

Source: www.research.prudential.com

Direct Subsidised Loans Undergraduate 4.45%

Direct Unsubsidised Loans Undergraduate 4.45%

Direct Unsubsidised Loans Graduate or Professional 6.00%

Loans first disbursed on or after 01.07.2017 and before 01.07.2018Borrower TypeLoan Type

The interest rates shown above are fixed rates for the life of the loan.Source: www.studentloanhero.com

Source: Newamerica.org study, Ticas.org

Students with loans 38% 62%

Students without loans 40% 60%

Graduates with loans: Not paid off 39% 61%

Graduates with loans: Paid off 51% 49%

Graduates without loans 49% 51%

Male Female






Federal Fiscal Year 2017

Q2 Q3 Q4

Dollars Outstanding (bn) 21.2 20.8 22.4

Borrowers (mn) 8.2 8.0 8.6

















Less than 5k

5k to 10k

10k to 20k

20k to 40k

40k to 60k

60k to 80k

80k to 100k

100k to 200k

200k+

Includes outstanding principal and interest balancesSee: https://studentaid.ed.gov/sa/about/data-center/student/portfolioSource: Enterprise Data Warehouse

Table 3: Federal Student Loan Portfolio By Borrower Debt Size


US Mortgages: Continued expansion



Americans have a lot of mortgagedebt. In all, financial institutions inthe US hold about USD 10tn ofmortgage debt on family residences.To put that into perspective,mortgage debt stands about seventimes larger than student loan debt,and about ten times greater thancredit card debt in the US.

To better understand what trillions ofdollars in mortgage debt means,let's explore how much the averageAmerican owes or pays on theirmortgage through three differentlenses.

Average American's monthlyhome ownership costsRealistically, the size of a mortgagedoesn't tell you much about housingaffordability. Is a homeowner whohas a monthly mortgage payment ofUSD 1,000 and utility bills of USD900 in better shape than ahomeowner who has a monthlymortgage payment of USD 1,200and utilities expenses of USD 300?Most people wouldn't think so.

So, to better understand how muchthe average American pays in truehousing costs on a mortgaged home,I turned to data from the CensusBureau. Its American CommunitySurvey data reveal the medianmonthly cost of owning and living ina mortgaged home – includingmortgage payments, insurance, andutilities – was USD 1,494 in 2015.(The data does not include homesthat are not mortgaged, or notoccupied by their owners.)

> US Mortgage debt reaches USD 9.33tn as of 2017 end

> Thirty-year fixed mortgage rates increase to 4.42%

Mill

ion

US

D

12,500,000

13,000,000

13,500,000

14,000,000

14,500,000

15,000,000

Dec-2013 Dec-2014 Dec-2015 Dec-2016 Dec-2017

Chart 5: Total US Mortgages outstanding

Source: Census Bureau. Dec 2017

1.8%

20.1%

28.5%

20.2%

11.9%

7.0%

10.4%

0%

5%

10%

15%

20%

25%

30%

Less than$500

$500 to$999

$1000 to$1499

$1500 to$1999

$2000 to$2499

$2500 to$2999

$3000 ormore

Chart 6: US Monthly housing costs

Source: Census Bureau. Dec 2017

To an extent – Risingglobal debt leads torising global wealth.


NationalDebt

Interestper year

Debtper citizen

Debt as a% GDP

GDP PopulationInterestper second

%


National Debt: The printability of money



This is the gross government debt, which is the amount of money (the repayment value) owed by the governmenttoday calculated according to the SDDS 2014 and The Maastricht Treaty guidelines. In keeping with theaforementioned guidelines, we do not subtract from the debt any financial assets the government may own.Please also note the debt figures do not take into account any future government payments e.g. pension’spayable next year, or business and private borrowings.

> Governments together owe USD 63tn of outstanding debt

> Governments have raised over USD 30tn of new debt in the last ten years

> US has 31.8% share of total Government debt, followed by Japan at 18.8%

> Long-running fiscal deficits in the US and recent fiscal reforms should propel further debt load

Table 4: Debt Dynamics: Developed Markets (DM)

USA $20.87tn $187.80bn $5,955 $64,345 108.43% $19.24tn 324.35mn

Japan $9.54tn $123.18bn $3,906 $75,054 250.30% $3.81tn 127.24mn

UK $2.43tn $70.33bn $2,230 $36,431 83.04% $2.93tn 66.76mn

Canada $896.83bn $21.90bn $695 $24,716 54.83% $1.64tn 36.29mn

France $2.65tn $62.21bn $1,973 $40,077 99.24% $2.67tn 66.13mn

Australia $426.26bn $13.75bn $436 $17,390 30.84% $1.38tn 24.51mn

Germany $2.61tn $62.20bn $1,972 $31,211 65.36% $3.99tn 83.75mn

Italy $2.75tn $106.05bn $3,363 $45,249 137.18% $2.01tn 60.80mn

Greece $398.24bn $22.29bn $707 $36,832 193.57% $205.74bn 10.81mn

Spain $1.39tn $64.88bn $2,057 $26,769 105.72% $1.31tn 46.53mn

Source: www.nationaldebtclocks.org> USA: Gov. includes intragovernmental holdings and allowance of one day delay in banks

reporting to treasury.> Japan: Government data. Excluding fiscal investment and loan program bonds and FBs from

outstanding government bonds.> UK: Government data, released on the 21st of Feb 2018.Excludes public sector bank bailouts.

January is always the UK Gov's best month for money (taxes) coming in with a £10.0 billionsurplus, down £1.6 billion on last year.

> Canada: Government data, and it excludes Provincial Debt.> France, Spain, Australia and Italy: Government Data> Germany National Debt Source - This figure is the reported gross debt under the Maastricht

Treaty guidelines.> Greece: Greece's statistics service


National Debt: The printability of money



Table 5: Debt Dynamics: Emerging Markets (EM)

Brazil $1.52tn $154.97bn $4,914 $7,392 75.19% $2.03tn 206.77mn

Russia $197.19bn $12.80bn $406 $1,348 19.58% $1.01tn 146.30mn

India $1.15tn $75.33bn $2,389 $867 50.85% $2.26tn 1,330mn

China $5.09tn $177.82bn $5,639 $3,683 44.98% $11.31tn 1,380mn

$154.17bn $8.07bn $256 $2,829 44.34% $347.70bn 54.50mn

Turkey $232.62bn $17.20bn $545 $2,904 27.20% $855.33bn 80.10mn

Mexico $492.05bn $29.40bn $932 $4,381 46.87% $1.05tn 112.32mn

Pakistan $206.34bn $21.59bn $685 $984 71.04% $290.45bn 209.70mn

SouthAfrica

Source: www.nationaldebtclocks.org > Brazil, India South Africa, Turkey, Mexico, Pakistan: Government data> Russia: This is only Government debt; total external debt is over $500bn> China: This figure now excludes local government financing vehicles. We suggest you multiply

by at least 3.25 for this figure, then consider adding a figure for China's shadow banking(loans outside of formal banks)

NationalDebt

Interestper year

Debtper citizen

Debt as a% GDP

GDP PopulationInterestper second

%


Household Debt: EM nations in better shape than their DM peers



What is household debt?

Household debt is defined as allliabilities that require payment notpayments of interest or principal bya household to the creditor at a dateor dates in the future. Consequently,all debt instruments are liabilities, butsome liabilities such as shares, equityand financial derivatives are notconsidered as debt. According to the1993 System of National Accounts,debt is thus obtained as the sum ofthe following liability categories,whenever available / applicable inthe financial balance sheet of thehouseholds and non-profit institutionsserving households sector, such as:currency and deposits; securitiesother than shares, except financialderivatives; loans; insurancetechnical reserves; and otheraccounts payable. For households,liabilities predominantly consist ofloans, in particular, mortgage loansfor the purchase of houses.

The median household debt-to-GDP ratio among emerging marketeconomies increased from 15% in2008 to 21% in 2016, and amongdeveloped economies it increasedfrom 52% to 63% over the sameperiod.

The increase in household debtlevels could be predicated to cheapmoney through loosening monetarypolicies post the global financialcrisis. This in fact has raisedconcerns particularly after globalcentral banks, and after decades ofstimulus programs, failed to igniteinflation and spur wage growth.

Although household debt and easyaccess to credit can boost demandand build personal wealth, suchcreation has direct implications andis vulnerable to financial shocks asinterest rates begin to rise. Subduedwage growth and disruptive

catalysts fuelled by technology havehad serious impact on hiring asdemand for workers across manyindustries is being made redundantas automation and robots take over.Notably, delinquency rates havepicked up as households are unableto service debts on account ofstagnant disposable income.

Mortgage debt makes up the bulk ofhousehold debt in the developednations as compared to those inemerging countries. Developednations household debt accountsfor over 50% of the total householddebt while emerging countries only

accounts for just below 33%.

The rise in household debt typicallyhas a positive short-term but anegative medium-term relationshipto macroeconomic aggregates suchas GDP growth, consumption, andemployment. Moreover, this couldalso lead to downside risks to GDPgrowth and a higher probability ofstress to financial and bankingsectors. However, studies revealthat the short-term positive effectsare generally stronger and themedium-term negative effects areconsistently weaker for emergingmarket nations.

> Developed nations outshine their EM counterparts in raising household debt

> Total US household debt soars to record USD 13.15tn

> Chinese household’s debt is about 106% of their disposable incomes

0

10

20

30

40

50

199519961997199819992000200120022003200420052006200620072008200920102011201220132014201520162017

Emerging Markets Household debtDeveloped Markets Household debt

US

D T

rillio

n

Chart 7: Household debt across developed and EM nations


Household Debt

Emerging Markets Developed Markets

33.3USD tn10.2USD tn

(as of 1 September 2017)


Developed Markets Household Debt

% o

f GD

P

20171995Australia Canada France Germany Italy Japan Spain Switzerland US UK

0

20

40

60

80

100

120

140

52.0

122.7

56.8

102.4

34.8

58.657.9

53.6

17.5

40.5

70.9

53.9

30.7

61.8

104.5

128.4

61.9

77.2

57.9

86.3

Emerging Markets Household Debt

% o

f GD

P

20171995

Brazil China India Indonesia Malaysia Mexico RussianFederation

SaudiArabia

SouthAfrica

Thailand Turkey0

10

20

30

40

50

60

70

80

15.521.5

7.9

46.7

5.810.7

14.8 16.7

52.9

67.1

11.817.0

1.4

16.3

6.713.9

28.434.0

41.1

68.3

0.7

17.6

Household Debt: EM nations in better shape than their DM peers



Charts 8 & 9: DM and EM country wise breakdown of household debt as a % of GDP




Negative Yielding Debt: Has there been a paradigm economic shift?



Since the global financial crisis,inflation has remained low globally,leading to subdued growth. Today,central bankers are still respondingto this low inflation environment byconducting unorthodoxaccommodative policies, except forthe US, where policy tightening is atcentre stage, even if the inflationtarget hasn’t yet been met.

As short-term policy ratesapproached zero, central bankscarried out further loosening byproviding forward guidance aboutthe expected future path of interestrates and by lowering term premiathrough large-scale asset purchaseprogrammes. In the case of theBOJ, the yield curve control remainsintact through a consistent bondpurchase mandate, thus pushingyields into negative territory.

In June 2014, following in thefootsteps of the Danish NationalBank, the European Central Bank(ECB) became the first majorcentral bank to lower one of its keypolicy rates to negative territory. Thedeposit facility interest rate is now at-0.4% while the main refinancingoperations rate is set at zero.Simultaneously, the ECB continueswith the asset purchase programme(APP) covering a broad range ofinvestment-grade securities.

These policies are complementaryinstruments and are necessary toensure that sufficient stimulus isprovided to the economy to spurinflation to the ECB’s target level.

It remains a challenge to assesshow long these sub-zero to low-interest rates will persistconsidering the implications awithdrawal of such policies wouldhave on the psyche of borrowersand the markets.

Negative interest rates havebecome part of the central bank’smandate towards a policy responseduring an economic downturn whennominal interest rates are alreadyvery low.

However, there are limits to how farinterest rates can fall below zero inthe absence of further measures toreduce general financial andeconomic risks.

With lacklustre growth, highunemployment and stubbornly low

investment activity in manyeconomies, policy-makers maywant to do more, and monetarypolicy is far from the only option,although other types of monetarypolicy measures can be used.Public investment projects and aboost to government spendingmore generally can go a long wayin complementing tighter policies.Moreover, Government spendinghas proven to be a viable toolwhen it comes to supportinggrowth, particularly when interestrates are low.

0

120

140

80

60

100

40

20

Q1 1995

Q2 1997

Q3 1999

Q4 2001

Q2 2006

Q3 2008

Q4 2010

Q1 2013

Q2 2015

Q3 2017

US

D M

illio

n

Chart 10: Cumulative debt that yield zero to negative

Source: Source: Bloomberg as of 28 Feb 2018

Government bondswith negative yields

of five-year maturities(as of March 2018)

Switzerland -0.499

Netherlands -0.187

Japan -0.100

Slovakia -0.087

Germany -0.007


Negative Yielding Debt: Has there been a paradigm economic shift?



The ECB became thefirst major central bankto lower one of its keypolicy rates tonegative territory.




Islamic Debt: Sukuk and the insatiable search for Islamic debt

> Islamic debt has further room for expansion in international capital markets

> Demand for Islamic debt instruments remains positive

> Sukuk has been an alternative source of financing for a variety of corporate and national activities

2005

Mill

ion

US

D

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

0

20,000

40,000

60,000

80,000

100,000

120,000

140,000

160,000

Chart 11: Global total Sukuk issuance – above long-term trends

Source: IIFM Sukuk study (Jul 2017, 6th edition), CIO office database

Mill

ion

US

D

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

Domestic issuance International Issuance

Chart 12: Total outstanding Sukuk – Domestic debt constitutes71% of total outstanding Sukuk

Source: IFM Sukuk study (Jul 2017, 6th edition)

Malaysia

Saudi Arabia

UAE

Indonesia

Qatar

Turkey

Pakistan

Bahrain

0% 10% 20% 30% 40% 50% 60%

55.00%

14.00%

9.00%

8.18%

3.55%

2.56%

1.94%

1.76%

Chart 13: Composite breakdown of all Sukuk outstanding – OnlyFive nations represent 90% of total Sukuk outstanding.

Source: IFM Sukuk study (Jul 2017, 6th edition)

The Sukuk market has evolved andexpanded to new regions; it is now awell-recognised asset class withinthe fixed income bond market. Thebroad-based interest in such sharia-compliant investments is global andhas seen wider investor participationacross Islamic and conventional debtinvestors. Moreover, counterpartieshave adopted Sukuk as an activetrading instrument and pricingremains very competitive togetherwith robust liquidity in the marketplace.

Today, Sukuk issuance has pavedthe way for various financing needsfor the issuers such as enhancementof bank’s capital base, monetary orbudgetary management, projectfinancing, aircraft financing etc., overthe basic financing needs. We alsostress on the standardization ofdocumentation and prudent marketpractices for further enhancement tobring in more depth and breadth tothe Islamic finance market.

The Sukukmarket hasevolved andexpanded tonew regions




Islamic Debt: Sukuk and the insatiable search for Islamic debt

MYR 61.0000%USD 20.1400%SAR 4.3200%SDG 2.2500%BHD 1.7400%QAR 1.6800%PKR 1.4000%BND 1.0300%TRY 1.0100%AED 0.9600%SGD 0.3200%CFA 0.1300%

OMR 0.1000%EUR 0.0900%KWD 0.0400%JOD 0.0300%CNY 0.0300%YER 0.0300%IRR 0.0200%NGN 0.0200%BDT 0.0040%MVR 0.0004%RS 0.0004%

Chart 14: Currency breakup of all outstanding Sukuk – US Dollar issuance makes up only 20% of allSukuk outstanding.

Source: IIFM

0% 10% 20% 30% 40% 50% 60% 70% 80% 90%

100%

Middle EastInvestors

Sovereign 36%

Quasi Sovereign 19%

Corporate 37%

IFI 8%

EuropeanInvestors

USInvestors

AsianInvestors

AsianInvestors

Average all Sukuk Average GCC Average excluding GCC

Chart 16: Composite breakdown of issuer typeacross all outstanding Sukuk issuance

Chart 15: Who invests in Sukuk?

Source: IIFM, Emirates NBD CIO Office Source: IIFM



Interesting Facts

Global debt has reached a record USD 233tnor 295% of Global GDP.

A staggering USD 71tn of new debt raised inthe last decade (2007-2017).

The US has more government debt than anyother country.

The US debt ceiling was created in 1917 at alimit of USD 11.5bn during WWI to allow greatersimplicity and flexibility during the war byallowing the Treasury to borrow any amount itneeded as long as the amount was below thislimit. Prior to this, Congress had to approve eachissuance of debt. To change the debt ceiling,Congress needs to enact specific legislation andthe President must approve the legislation.

The US was in debt even in its first yearlyreport on 1 January 1791, to the amount of USD75,463,476.52. Every president since Trumanhas added to the national debt. The debt ceilinghas been raised 72 times since 1962, including18 times under Reagan, eight times underClinton, seven times under Bush and, as ofAugust 2011, three times under Obama.

Time Magazine identified 25 people who are atmost to blame for the US financial crisis,including Alan Greenspan, George W. Bush,Bill Clinton, the CEO of Merrill Lynch, and theAmerican consumer. (“25 People to Blame forthe Financial Crisis.” Time Magazine. 11February 2009).

When Reagan took office, US debt was underUSD 1tn. After he left eight years later, debtwas USD 2.6tn and the US had moved frombeing the world’s largest international creditorto the world’s largest debtor nation.




Interesting Facts

And finally, food for thought… "Rising interest rates wouldmake debt obligations harder toservice. Can the world adapt tohigher interest rates?"

Post the Great Recession, debt has surged inmost of the G7 nations, unlike EM nations,which have been more conservative.

A loan of GBP 1,000 at the rate of 6% p.a. wasgiven by a UK school to the city of St Albans in1722. St. Albans City council, despiteacknowledging the loan, has not made anyrepayments on it. As of 2012, the debt standsat GBP 21.8bn.

1835 was the only time in US history when thecountry was debt free, when Andrew Jacksonpaid off what he called “the national curse”. Itlasted exactly one year.

As a share of its GDP, Japan’s gross nationaldebt far exceeds that of all other nations.

If you have no debts and USD 10 in yourpocket, you have more wealth than 25% ofAmericans.

You could wrap USD 1 bills around the Earth768 times with the current outstanding debtowed globally

If you lay USD 1 bills on top of each otherthey would make a pile 21,535 km, or 13,381miles high!


Syed Yahya SultanHead of Fixed Income StrategyCIO Office | Wealth Management

Email: [email protected]: +971 4 609 3724Mobile: +971 55 886 3947




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