Sukuk market gains Gulf interest

Long-term sukuk issuance rose by 21 per cent year-on-year in the first quarter, as Gulf states with worsening fiscal balances tapped international bond markets, data from Fitch shows.

GCC states – along with Mal­aysia, Indonesia, Turkey, Singapore and Pakistan – issued US$11.1 billion of sukuk in the first three months of the year. These states are choosing to issue more of their debt as sukuk rather than conventional bonds, the data show. These countries issued 39.3 per cent of their debt as sukuk – the highest ratio of sukuk to conventional debt in eight years, according to Fitch.

Gulf states lost $360bn in revenues from oil sales last year, according to the IMF. That has led to fiscal deficits across the Gulf, meaning that governments are selling off sovereign wealth, cutting public spending and issuing new debt.

Oman issued $520 million in sukuk in October. In February, Bahrain cancelled a planned $750m Islamic bond issue after its credit rating was cut by Standard & Poor’s. It reinstated the bond issue several days later, at a slightly reduced value of $600m. Qatar’s Ahli Bank issued a $500m sukuk this month that was 2.4 times oversubscribed, according to Reuters.

S&P estimates that Gulf states will issue $45bn in new debt this year, up from $40bn last year. Saudi Arabia, which is expected to issue $31bn of debt this year, aims to tap international bond markets for the first time in its history by the end of the year.

The value of sukuk issuance this year “will at least match” last year’s value, Fitch said.

Sukuk issuance last year fell to $35.5bn, its lowest level since 2010, according to Bloomberg data. Lower global growth may press on corporate demand for sukuk even as Gulf sovereigns turn to new debt to finance their deficits, according to S&P.

Credit ratings for Gulf states have also been hit in line with falling oil price estimates.

Moody’s cut Oman and Bahrain’s credit ratings last month and has put the rest of the Gulf on notice that it will be subject to further negative downgrades. That will push up prices for Gulf borrowers seeking to tap sukuk markets.

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