GCC seeks to diversify funding
GCC sukuk issuances jumped 37.7 per cent in the first half of 2017 as governments seeking to plug deficits amid low oil prices diversified away from the conventional bonds they have been loading up on in recent years, according to S&P Global Ratings.
But the rating agency said that it doesn’t think issuances of sukuk will grow at the same rate in the next couple of years, with hurdles such as a lack of standardisation of sukuk rules deterring sales.
S&P expects sukuk sales in the region to increase to between US$75 billion and $80bn this year, up from its previous forecast of $60bn to $65bn as a result of this push to diversify their investor base.
“While S&P Global Ratings expects the volume of sukuk issuance to remain strong in 2017, this is likely to be the exception rather than a new norm,” said Mohamed Damak, primary credit analyst at S&P.
“The large transactions in the first half of 2017 are unlikely to be repeated in 2018, in our view. We also continue to believe that the relatively complex process for issuing sukuk continues to deter some issuers. However, we note that some progress has recently been made by the Islamic finance industry standard-setting bodies.”
Regional governments have been selling international bonds and sukuk, in the case of Saudi Arabia for the first time, at a more accelerated pace in recent years in a bid to plug holes in their budgets caused by lower oil prices.
Governments in the oil-rich Arabian Gulf had not tapped the bond market in any significant way until last year. Most countries in the region had maintained budget surpluses before the crash in the price of oil that began in the summer of 2014, during which oil shed more than 70 per cent of its value.
That drop in the value of crude oil, the lifeline for many countries in the region, changed the equation, with the result that 2016 was a record year for regional bond issues in the region, with over $60bn worth of fixed income sold.
That has caused excitement among long-term investors who are seeking to diversify their bond portfolios from a relatively stable part of the world that offers attractive yields at the moment.
Of those sales last year, Saudi Arabia sold $17.5bn worth of bonds in its first international sale and Qatar sold $9bn.
Despite the record value of issuances, S&P said that a big funding gap, which it estimates at $275bn remains. And about half of that is expected to be raised through bonds and sukuk.
Updated: June 19, 2017 04:00 AM