GCC sovereign sukuk issuance to reach $34bn this year on rising funding needs

Gulf states are looking to increasingly use sukuk instruments to develop Islamic debt markets, Moody's says

Saudi Arabia is expected to see the biggest rise in sovereign sukuk issuances from the GCC in 2020, Moody's says. AP

Sovereign sukuk issuance in the Gulf is expected to pick up pace in the second half of this year, driven by higher government funding needs amid lower oil prices and the pandemic-driven economic slowdown, according to Moody’s Investors Service.

Gulf sovereign borrowers are expected to raise a total of $34 billion (Dh124.78bn) through Islamic bonds this year, up from $25bn in 2019, the lead analyst of Moody's sovereign risk group, Thaddeus Best, said in a media call on Tuesday. The biggest rise will come from Saudi Arabia, the largest Arab economy, whose sukuk issuance is expected to grow by roughly $8bn in 2020, to $27bn.

“We expect a bit of an increase from Oman to $3bn this year and Bahrain to $1.5bn,” Mr Best said.

With lower oil prices, Gulf states continue to diversify their funding mix in favour of sukuk instruments to develop their Islamic debt markets. The upcoming refinancing of several sukuk issued after 2015 will also drive issuance, Moody’s said.

Globally, sovereign sukuk issuance volumes were broadly flat in the first half of 2020.

However, Moody’s expects a 43 per cent year-on-year increase in sovereign sukuk issuance to $94bn in 2020, driven by borrowers in the GCC, it said in a report released on Tuesday.

“We expect a recovery in market conditions and sovereigns’ sizeable borrowing requirements will support a full-year [rise],” the report said.

“Monetary stimulus measures implemented by central banks across the GCC – including the easing of capital requirement and prudential liquidity measures – should help to free up liquidity in the banking system, supporting demand for sukuk and other securities.”

Overall sukuk issuance in the Gulf, which includes sovereigns, financial institutions and corporate borrowers, is also expected to rise this year, despite a drop in total global sukuk issuance, Moody’s senior credit officer Nitish Bhojnagarwala said during the call.

Moody’s expects global sukuk issuance to shrink 5 per cent this year to around $170bn, the first drop after four years of expansion. The total value of sukuk grew 36 per cent in 2019.

Despite the anticipated decline on last year's figure, the total value of sukuk issued this year “is expected to be the second highest issuance level ever”, the ratings agency said.

Globally, the issuance of Sharia-compliant bonds reached $77bn in the first half of this year, of which GCC issuers accounted for $28bn, a 7 per cent year-on-year increase.