GCC SUKUK ISSUES TO FALL AS LIQUIDITY TIGHTENS AND BORROWING COSTS RISE

▶ S&P says higher US Federal Reserve rates are having a knock-on effect with Gulf issuance down by about 15%

The issuance of Sharia-compliant bonds in the Arabian Gulf region has slowed by about 15 per cent in the first three quarters of this year and is likely to remain lower than the $95.9 billion figure for 2017.

The main factors behind this are tightening international liquidity and rising borrowing costs as the US Federal Reserve increases interest rates.

Sovereigns, financial institutions and corporate issuers in the region are expected to sell $70bn to $80bn worth of Sharia-compliant debt this year, said Mohammed Damak, senior director and global head of Islamic finance at S&P Global Ratings. The number may climb as high as $100bn if other sukuk deals are included, he added.

“Global liquidity is becoming more scarce and more expensive,” said Mr Damak who was speaking in Dubai yesterday.

“The Fed is increasing the rates and the ECB [European Central Bank] will start to reduce its asset purchase programme base …. we think the cost of funding for the issuers is increasing,” he said.

“All the liquidity that used to be channelled to emerging markets, including the GCC, is reduced because of that.”

Issuers in the GCC, home to about a third of proven global oil reserves, sold $95.9bn worth of sukuk last year, a 41 per cent year-on-year rise.

With the reopening of issues, the number at the end of last year climbed to $118.9bn, a 37.2 per cent jump from a year earlier.

The fall in issuances this year is even greater, about 34 per cent, if only foreign currency sukuk transactions are considered, Mr Damak said.

Lower financing needs of issuers, especially sovereigns, was cited among the reasons for the slowdown by S&P.

The GCC, which still relies heavily on the sale of hydrocarbons for revenues to fuel its economies, resorted to raising capital from domestic and international markets in the wake of a three-year oil price slump that began in mid-2014.

The price of crude, which fell below $30 per barrel in the first quarter of 2016, has since recovered significantly, breaching $80 per barrel this year

The stability in prices and increased revenues have lowered the financing needs of Gulf states.

Last year “was a great year for sukuk, underpinned by jumbo issuances from some of the sovereigns in the region”, Mr Damak said.

In the UAE, the region’s second-biggest economy, sukuk transactions have almost doubled from $3.7bn in 2017 to $6.4bn this year.

Mr Damak expects the global and GCC sukuk markets to maintain the 2018 trends going into 2019.

The growth of assets for Islamic banks in the GCC in 2018 has also slowed down considerably and is more or less on par with conventional banks, he said.

“We expect that situation to continue in 2019, with around 4 per cent growth of total assets,” he said, adding that an increase in the geo-political risk or a significant drop in the oil prices are the two factors that could result in much slower growth in Islamic banking assets next year and beyond.

GCC Sharia-compliant lenders still have strong fundamentals and their profitability is adequate at about 1.5 per cent return on assets on average. The headline figure for non-performing loans at Islamic lenders is about 3 per cent, Mr Damak said.

“People were expecting the NPLs to grow after the oil price crash, but paradoxically it did not happen,” he said.

“What happened was that we saw an increase in the restructuring of loans by the banks to their clients to adapt to the new reality of the economy.”