Global sukuk issuance is unlikely to pick up pace this year despite expectations that revenue shortfall from plummeting oil prices would prompt a barrage of issuance in oil exporting countries, according to rating agency Standard & Poor’s.
While some commentators believed low oil prices would spur governments in oil-exporting countries to tap the sukuk market for funding to maintain current and capital spending, total issuance actually dropped in 2015 compared with the previous year.
“We believe issuance will remain muted over the next 6-18 months, with total issuance of $50 billion-$55 billion (Dh183.5 billion-Dh201.8 billion) in 2016. The complexity of sukuk issuance, uncertainty regarding US Federal Reserves’ policy revisions, and the government’s efforts to reduce financing needs in response to weak oil prices have and will continue to weigh on sukuk market activity, in our view,” said Mohammad Damak, Global Head of Islamic Finance, S&P Global Ratings.
Issuance in the second half of 2016 is expected to depend on monetary policy developments and volatility in developed markets as well as the policy actions of sovereigns in core markets — namely GCC countries and Malaysia — in response to lower oil prices.
While governments affected by the price drop are looking to spending cuts, taxation, and the privatisation of state companies to adjust to the new reality, their financing needs remain significant. “We think that part of these needs will be met by conventional debt markets and, to a much lesser extent, the sukuk market, with the complexity of sukuk issuance remaining a key deterrent to tapping the market,” said Damak.
Despite the significant drop in oil price since mid-2014, total sukuk issuance didn’t pick up in 2015 or the first half of 2016, as was predicted by several market commentators. In fact, issuance actually dropped in the first half of 2016 by 12.5 per cent compared with the same period in 2015. S&P expects sukuk market activity will remain subdued for the remainder of 2016 with total issuance reaching around $50 billion-$55 billion for the full year 2016 compared with $63.5 billion in 2015.
“In our opinion, one of the principal reasons explaining the lack of linkages between oil prices and sukuk issuance is the large stocks of fiscal assets that many GCC countries have built up through years of fiscal and current account surpluses. Along with conventional debt issuance, governments are now using these assets as a source of public-sector deficit financing,” said Damak.
In the first half of 2016, total conventional debt issuance (in the GCC) increased by 148.2 per cent compared with the same period in 2015, while sukuk issuance dropped by 15.2 per cent over the same period.
The broader rationale behind GCC sovereign sukuk issuance thus far, including that of central banks, has been for project financing, for benchmarking, or to offer liquidity-management instruments to local Islamic banks. Bahrain and Oman have been exceptions in the GCC as more active issuers of sukuk and conventional bonds due to the smaller size of their reserves and the significantly higher fiscal break even oil price for their respective budgets.
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