The Italian parliament has just approved the 2018 budget law that was submitted by the government in late October, and which is the last relevant act of the present parliament before the general elections at the beginning of this year. The proposed budget assumes a projected decline in the general government deficit from 2.5% of GDP in 2016 to 2.1% in 2017 and aims to further reduce it to 1.6% this year — in order to achieve a virtual balanced budget in 2020 in compliance with EU policy.

The projected decline in the deficit is partly based on an improved economic outlook: indeed, aft er two years of real GDP growth of around 1%, the forecast for this year has been raised to 1.5% and the economy is expected to expand at a 1.5% rate also in 2018 and 2019.

It would then appear that with the 2018 budget, Italy is aiming to achieve a credible fiscal consolidation path and higher competitiveness and productivity: in essence, to be (again) a good place to invest in. Increased foreign direct investments have indeed been a main target of the present and previous government and today’s favorable business cycle developments may indeed be a boost to achieve that result.

So, assuming that Islamic investors intend to benefit from the favorable outlook of the Italian economy, and to include Italy in their investment portfolio, what would be the preferred asset classes?

Real estate appears to, of course, be the privileged choice, as recent history confirms. Islamic investors could target single Shariah compliant retail trophy assets fully rented and therefore producing a stable yield, but prices in Milan and Rome, the most favored destinations, are picking up. Closed-end real estate funds, although less liquid, could be an interesting alternative provided that the investor has a medium to long-term holding strategy. One of these funds has been created in order to acquire buildings owned by provinces and municipalities and leased to the public administration, which would also be ideal assets for the issuance of Sukuk Ijarah.

On the debt side, the ELITE Club Deal (ECD) — Basket Bond has just been launched. The aim of the ECD is to create a systemic platform which interlinks corporates and investors. The innovative tool is represented by an asset-backed security (the ‘ELITE Basket Bond’) collateralized by a basket of bonds issued by companies belonging to the ELITE program managed by the Italian Stock Exchange, ie Italian companies with high growth potential.

The ELITE Basket Bond is structured in two phases. In Phase I, each issuer issues a bond with certain predefined characteristics. In Phase II, the bonds are used as collateral by an SPV set up under Italian law on securitization. It could be explored whether a similar structure could be set up in a Shariah compliant manner, using the Italian Islamic bonds rather than conventional bonds, to be subscribed by an SPV issuing Sukuk (to be continued).


his article was first published in Islamic Finance news Volume 15 Issue 2 dated the 10th January 2018.