Brunei Government Bonds Sukuk Al-Ijarah (Update)

I thought I will give a little bit on update of the first ever issuance of the Brunei Government Islamic Bond - Sukuk Al-Ijarah. The first ever Brunei Government bond issuance of B$150 million was a total success and issued at 3.4%. The total bids were oversubscribed by about tens of millions of dollars.

Having an official rate will now make life easier for other agencies and companies in Brunei to fix their rates. This is one of the first aims of the government in launching the sukuk. Unlike other governments whose aim to raise bonds is to use the money, the Brunei Government does not need such money especially with oil prices now at US$67 a barrel and having healthy sums in our reserves. As we build up our expertise and also build our yield curve and the public's expectations, we can slowly build up our own capital market. That's something we need to do very quickly so that our private sector will be able to issue their own papers and debt notes in the future. This will enable them to get their funding at a rate much lower than relying on the banks' loans with their relatively higher interest rates.

Anyway, I thought I will share with you what Bloomberg way back in July 2003, wrote about Brunei's capital market efforts (my apologies to Bloomberg for copying this without your consent):-

Brunei bonds with Liar's Poker - July 27, 2003 - By Bloomberg

The counter of a bookstore in Brunei's capital showcases an unlikely pair of books: Harry Potter and the Order of the Phoenix, and Liar's Poker. Both are page-turners in their own right. The former is the fifth instalment of JK Rowling's wildly successful Harry Potter series; the latter is Michael Lewis's 1989 account of his stint as a Salomon Brothers bond salesman. The selections make an interesting contrast and raise a question: what's this store thinking?

"Well, Harry Potter, of course, is probably the biggest book in the world," says employee Saiful Rahman. "Liar's Poker is there because Brunei wants to be a big player in bonds."

That even employees of a tiny bookstore in Bandar Seri Begawan know bonds may play a role in Brunei's future prosperity says a lot about its determination to launch a vibrant debt market. Then this tiny Muslim nation of 345 000 people can work on winning a piece of the global bond business, especially the nascent one for Islamic debt. Brunei has little chance of unseating global bond capitals such as London, New York or Tokyo. Especially when you consider Brunei doesn't even have a bond market; it only recently launched an equity exchange. Its vast oil wealth left the government little incentive to create financial markets. It's now building them. Asia's developing economies could learn much from the process.

After all, the region has been slower to create large, liquid, fixed-income arenas than investors had hoped. While Malaysia and South Korea are making good progress on the bond front, companies in many Asian economies still rely on banks for financing. Brunei may provide an intriguing test case of a southeast Asian economy building a market from scratch. It needs to create a debt department and form a group of dealers to bid on and distribute debt. From there, Brunei needs to develop a vibrant secondary market to pave the way for corporate, mortgage-backed and asset-backed securities. It's not completely unlike the challenge elsewhere in Asia. Indonesia, Malaysia, the Philippines, South Korea and Thailand have been busy, but progress has been unsteady and the lack of deep debt markets remains a major vulnerability for the region. Like its peers, Brunei ends up shipping large quantities of its financial reserves overseas. Its economy would be better off if that money stayed in the country and was put to productive use.

"It's really about developing ways for us to use our own money in our own economy," says Lim Hong Him, the assistant chief executive at the Brunei Economic Development Board.

So Lim and his colleagues are working to diversify the economy. Oil and gas account for 94 percent of exports. Yet the source of the nation's wealth could vanish in 20 years if predictions about Brunei's wells running dry come true. Efforts to fill that void are intensifying. One strategy is to turn the country into an offshore financial centre akin to Bermuda or the Cayman Islands. Brunei also sees great potential in the growing market for bonds and other investment products for Muslims; Islam bans paying and receiving interest. Brunei wants to be at the forefront of creating alternative asset classes for followers of Islam.

Prior to the 1997 Asian financial crisis, regional developing nations did not bother building large and active government bond markets, never mind ones for corporate debt. The crisis was a lesson in the importance of having liquid debt markets. And selling more debt in local currencies could shield Asia from problems across the globe. And here in Brunei, where energy wealth and the government of Sultan Hassanal Bolkiah dominate the economy, a thriving private sector needs to be created. For an attention-deprived - and investment-deprived - southeast Asian nation like Brunei, a thriving bond business could be just the thing. It's for this reason folks like Lim are discovering Liar's Poker. More than 13 years after Lewis wrote it, the book stands as perhaps the most graphic account of the bond business and how things really work on Wall Street.

The tale is quite relevant to Brunei. Lewis described his job at Salomon Brothers as transferring money in the form of bonds from those outside the US who saved to those inside the US who consumed. In a nutshell, Asian countries like Brunei want to do the same for their economies. A credible bond market could go a long way towards pulling more business and foreign capital their way.