GCC sukuk issues reach $5.2B this year

Published May 23rd, 2016 - 07:00 GMT
In March 2016, Dubai Islamic Bank successfully closed a $500M sukuk issuance. (File photo)
In March 2016, Dubai Islamic Bank successfully closed a $500M sukuk issuance. (File photo)

The sukuk market in the Gulf Cooperation Council (GCC) is buzzing than ever.

So far this year, banks and corporates in the GCC have issued $5.2 billion (Dh19 billion) in sukuk, and industry watchers say the asset class offers a sweet-spot from both the supply and demand side especially at a time when local equities have been sagging. The economic environment with low global growth, and still near zero interest rates, makes it attractive for corporates to raise capital and is also seen as refuge for investors seeking medium yields amid high volatility in equities.

“What we see is a resurgent interest in sukuks, whether it is in primary or secondary market. Everyone is going to that market as the risk-appetite is less in equities. And we are seeing good number of people waiting to subscribe in primary market. And that I think would continue now,” Mohammad Ali Yasin, managing director at National Bank of Abu Dhabi Securities told Gulf News.

Even Mohieddine Kronfol, CIO, Global Sukuk & MENA Fixed Income, Franklin Templeton Investments Middle East agree with Yasin’s views.

“As markets firmed up and spreads compressed, bond and Sukuk markets are becoming more attractive as a source of funding. We are starting to see a noticeable pickup in the pace of issuance and expect that to carry through to Ramadan,” Kronfol said.

And even the pipeline looks strong. Companies like DP World, and a few others in Saudi Arabia have been issuing sukuk to meet their funding needs as liquidity in the banks dry up and before another bout of interest rate hikes takes place in the United States.

“It is attractive to prefund now rather than wait as interest rates remain still very low and are likely to increase over time, though we only expect a modest increase in base rates. Credit spreads are likely to widen as lower savings ratios and higher working capital requirements continue to tighten liquidity in the interbank market,” said Jaap Meijer, Managing Director, Equity Research at Arqaam capital.

With falling oil prices, liquidity with the GCC banks, which gets a chunk of its deposits from the government, have been crimping, forcing companies to depend on sukuk and bond markets for capital.

“Liquidity in the banking sector has certainly thinned as government deposits reduce and borrowings increase to fund the ongoing expenditure,” said Anita Yadav, head of fixed income at Emirates NBD.

A key indicator of this is the rising interbank borrowing rates. Three-month Saudi Arabia Interbank Offered Rate (SAIBOR) has tripled to 2.12 per cent from May last year, and is at its highest in over 6 years. That said liquidity in the UAE banking sector is relatively better. Three months Emirates Inter Bank Offer rate (EIBOR) has increased to 1.09 per cent this year, from 0.74 per cent last year.

But they have a limited time at their disposal. Any rise in US rates, which is widely expected to happen in September, would trigger bond prices to fall and yields to rise. Therefore issuing new sukuks would be more expensive for issuers.

Attractive features

Compared to conventional bonds, sukuks may offer slightly lower rates, which is about 15 basis points, but have attractive features.

“Islamic funds do not engage in speculation much and their trading turnover is generally low which makes sukuk less volatile than the conventional bonds. This lower volatility and generally higher credit ratings of sukuks tend to make them attractive for the traditional investor base,” said Yadav.

Sukuk tend to be less volatile so it reduces the overall risk in the portfolio, and also tend to be better rated, improving the quality of the portfolio. Moreover, sukuks are generally shorter duration so it reduces the risk of interest rate rises.

Volatility in sukuk is generally low and capital protection is higher than in equities. In the current era of negative interest rates, return on bank deposits is minimal. Real estate is generally an illiquid investment. Although UAE real estate prices have fallen in the recent past, rental yield remains one of the best in the world.

“A portfolio should have diversified assets in it. That said, equities and real estate tend to perform better in rising global growth environment, while bonds and sukuk behave conversely. In the current environment of slow economic growth in the world, I expect sukuk to perform better than most other asset classes,” Yadav added.

By Siddesh Suresh Mayenkar

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