MOODY’S: ISLAMIC FINANCE GROWTH IS SOLID WITH SUKUKS AND GCC REFORMS

▶ Demand for Islamic bonds has stayed strong as issuances have more than doubled over the past decade

Islamic finance is set to outpace the growth of conventional banking as governments increasingly tap the sukuk market and individuals use more Sharia-compliant financial instruments, according to Moody’s Investors Service.

“The Islamic finance sector will be supported by governments whose objective is to grow the Islamic finance industry both domestically and globally, as well as by continued demand for Islamic products from individuals,” said Nitish Bhojnagarwala, vice president and senior analyst at Moody’s.

“Islamic insurers’ penetration into South East Asia and North Africa will also drive growth in the industry.”

Islamic banking penetration in the GCC, where growth has been most pronounced, increased to 45 per cent in September 2017 from 31 per cent in 2008, while during the same period sukuk issuances more than doubled to $100 billion from $42bn, Moody’s said.

Saudi Arabia has $292bn of Islamic assets, making it the largest market for Sharia-compliant products globally, it said.

Demand for Sharia-compliant products in the GCC in recent years has led conventional banks to beef up their own offerings of such products.

Also, despite a widely publicised legal fight between the Sharjah-based energy company Dana Gas and its bondholders over the legality of its $700 million sukuk, demand for sukuk has remained strong.

“Depending on the final outcome of the dispute, the Dana case could have a negative implication for the sukuk industry,” Moody’s said.

“However, so far this case has not had an impact on investor confidence in the Islamic finance industry in general and in sukuk in particular. Unless there is an outcome that supports Dana Gas’ position or further similar cases to arise, we do not expect this to change.”

Sovereign sukuk issuances rose 44 per cent in 2017 from a year earlier, rising to $55bn. The rating agency said it expected sukuk issuance to remain stable this year, though the rising price of oil may decrease the need for GCC governments to sell debt.

“Sovereign issuance has underpinned the recovery in the global sukuk market activity after a sharp drop in activity in 2015,” Mr Bhojnagarwala said.

“We expect sovereign sukuk issuance volumes to continue to grow in 2018 as governments look to diversify their financing mix and support their strategic objectives of expanding the Islamic finance market both locally and globally.”

Separately, Moody’s said large Arabian Gulf corporations, including sovereign-owned firms, will likely tap capital markets over the next five years, in the wake of structural reforms by the governments coping with the oil price slump.

“GCC non-financial corporates in mature and capital intensive sectors.. are likely to access debt markets more and more to fund capital investments, while others are exploring options to diversify funding sources to reduce reliance on domestic banks,” Rehan Akbar, vice president at Moody’s said in a report.

These sectors include oil and gas, refining and petrochemicals, utilities, real estate and infrastructure.

Governments in the sixmember economic bloc of the GCC have largely met funding needs of quasi-government companies in the past. The Gulf states, which are trying to implement economic reforms to cut their dependence on oil revenues, are now encouraging these companies to secure funding through capital markets. A number of regional energy companies – including Saudi Aramco, the world’s biggest oil producer, and state-controlled Abu Dhabi National Oil Company – have already tapped international debt capital markets in recent months.

Measures such as taxes and removal of fuel and utility subsidies are fanning inflation and putting a varying degree of pressure on corporate profits, Moody’s said. Elevated regional geopolitical risk has also increased the complexity in the business landscape and is likely to dampen investor sentiment.

For example, the Saudi Arabia-led trade boycott of Qatar has negatively impacted companies in Doha, where real estate, contracting and hospitality firms in particular are hurting.

Most regional corporates rated by Moody’s remain “fundamentally healthy”, however, further pressure on sovereign credit quality could begin to act as rating constraints for these companies, the agency said.

Negative rating outlooks on Qatar, Oman and Bahrain suggest a higher probability of downward pressure in these markets compared to those in the UAE, Kuwait and Saudi Arabia where the sovereign outlooks are stable, it noted.

With fewer organic growth opportunities available in the GCC corporate sector, Moody’s expects rising industry consolidations and international acquisitions – examples of which have already been seen in the telecoms, petchems and real estate sectors.