SOVEREIGN SUKUK PRICING ANALYSIS: DO MACROECONOMIC VARIABLES MATTER?

Development of the global sukuk market has been pioneered by Malaysiawith the launch of the first sovereign 5-year global sukuk of US$600 millionin 2002. Since then, the sovereign sukuk market has developed rapidly, withsovereign sukuk being issued by the Governments of Turkey, Qatar, UnitedArab Emirates, Bahrain and Indonesia to name a few. In view that sovereignsecurities are not totally free from default, there is also a great deal of concernassociated with them as some of the issuing countries have experienced majordebt servicing problems in the past such as the Greek debt crisis. As such, itis essential to analyze whether the sovereign sukuk yields do reflect themacroeconomic fundamentals of the issuing country. Based on the analysisof five countries in Asia and the Middle East, this study employs panel datafrom 2006 to 2013 and shows that only the inflation rate is able to explain themovement of sovereign sukuk yields. The insignificance of othermacroeconomic variables such as GDP growth and money supply indicatethat tagging the economic growth of the issuing country onto the pricing ofsovereign sukuk yields may not be feasible at this juncture. Hence, it isconcluded that in order to develop a standalone pricing mechanism differentfrom the one used by the conventional bond market, more efforts are neededso that the sukuk market will expand with even more market playerparticipation to create the liquidity needed for it to develop its own pricingmechanism. JEL Classification: C58, G17