Market buoyed by sovereign and financial institution issuance
Prospects for the Islamic bond (sukuk) market in the Gulf region remain healthy due to rising issuance by regional governments and financial institutions, says ratings agency Standard & Poors.
We have expectations of a relatively bright and healthy pipeline for sukuk in the medium term, says Karim Nassif, associate director, infrastructure finance at S&P, speaking ahead of the agencys Islamic finance conference being held in Dubai on 14 October.
A total of $20.3bn-worth of sukuk have been issued in the GCC this year as of 5 October, according to the agency. This is a 27 per cent increase on the same period last year.
The rise comes despite corporate and infrastructure issuance falling by almost a third compared with the same period in 2013.
Yet regional governments issuing large sukuks, such as Dubais 15-year $750m sukuk earlier this year, as well as a number of regional banks issuing Islamic bonds have more than compensated for the dip, says Nassif.
With billions of dollars of infrastructure projects planned in the coming years across the region, including Dubais preparations for Expo 2020, the use of sukuk has been touted as a possible means of funding projects.
Nassif says use of corporate and infrastructure sukuk remains in its early days, and that the future growth of the financial instrument will come down to how attractive it is to issuers as opposed to bank lending or conventional bonds.
The question is can the sukuk market prove to be flexible enough so these issuers will chose sukuk over bonds. By flexible, I mean can you get the tenors you need, can you get the amounts you need, Nassif says.
Currently he says sukuk issuance is more of an option than a necessity, adding that often large long-tenored Islamic bonds are issued by the parent company and the funds are filtered down to smaller entities and joint ventures that are overseeing projects.
Recent regulation in the UAE placing caps on bank lending to government-related entities may also bolster sukuk issuance, says S&P.
The caps are part of the governments efforts to boost the regions capital markets by encouraging corporates to include sukuks and conventional bonds as part of their funding strategy rather than just relying on bank lending.
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