Global sukuk issuances to reach up to $115bn in 2019 with oil wild card

The total sukuk issuance from the GCC is expected to climb higher than last year, S&P says

The Kingdom Tower in Riyadh. Saudi Arabia has unveiled seven investment principles aimed at increasing foreign direct investment. Bloomberg

The global issuance of Sharia-complaint foreign and local currency bonds this year is expected to reach as much as $115 billion (Dh422.1bn), the same level of 2018, with oil prices being a determining factor of total size of sales, according to S&P Global Ratings.

The total sukuk issuance from the six-member economic bloc of GCC is expected to climb to $47.6bn, slightly higher than $46bn achieved in 2018, with Saudi Arabia leading the sovereign issuers from the region, S&P said on Tuesday.

The UAE, the second-biggest GCC economy, may sell $8bn worth of sukuk in 2019, slightly lower than $9.1bn recorded at the end of 2018, with private sector corporations dominating the issuance in the country this year.

S&P has developed “optimistic” and “pessimistic” growth scenarios for the global sukuk market in 2019 due to the heightened uncertainty this year in the wake of the global liquidity squeeze, the US Federal Reserve's gradual interest rates increases, and higher cost of funding for issuers.

Geopolitical uncertainties will also be a factor in how investors perceive the risk in buying regional sukuk, with the oil price remaining the biggest factor influencing financing needs and the ultimate volume of paper sold from the hydrocarbon-dependent economies of the GCC, S&P noted.

Under its optimistic scenario, S&P estimates the total sale of global sukuk to reach $115bn. The foreign currency issuance could range between $32bn and $28bn, in optimistic and pessimistic growth scenarios, respectively, against $30bn recorded at the end of 2018.

“If we are to see higher oil prices, GCC countries will have lower financing needs [and vice-versa]. Oil prices will be the key to how sukuk markets performs,” Mohammed Damak, senior director and global head of Islamic finance at S&P told reporters in Dubai. “Saudi Arabia [within the GCC] will be the biggest sukuk issuer in both optimistic and pessimistic scenarios.”

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Despite their efforts to diversify their economies in the wake of the three-year oil price slum that began in the middle of 2014, sovereigns in the GCC, home to about a third of the world’s proven oil reserves, still heavily rely on sale of hydrocarbons to fuel their economies. Their financing needs are tied to the oil price, which has seen extreme volatility in the past few months, dropping about 40 per cent since October and then clawing back some of the lost ground. Brent, the benchmark against which half of the world’s oil is priced, is currently hovering around the $60 per barrel mark.

Issuers from the GCC, both sovereigns and private sector firms, have used a combination of Islamic and conventional debt instruments to beef up their finances. Although the Islamic finance industry has grown at a rapid pace, it is still far from achieving its true potential with standardisation of sukuk being one of the biggest impediments to its growth, Mr Damak said.

Sharjah energy firm Dana Gas, which restructured its $700 million sukuk after a lengthy legal battle with its creditors last year as it deemed its sukuk non-compliant with Sharia laws, has dented investor confidence, he said. About 25 per cent to one-third of the global investors are from the US and Europe and are reluctant to invest in Sharia-compliant bonds post the Dana Gas episode, he added.

“Some of the investors have altogether exited from sukuk products due to uncertainty attached to it,” he explained. “This is why standardisation is so important.”