The sukuk market in the Gulf will continue to grow in 2015, but potentially as not as fast as last year, warns rating agency Standard & Poor’s (S&P).

The agency says low oil prices and the prospect of the US Federal Reserve starting to increase its benchmark interest rate in the second quarter of 2015 could dampen the issuance of sukuk (Islamic bonds).

The drop in oil prices could reduce economic growth and infrastructure-related borrowing in core sukuk markets. The Federal Reserve’s polices could lower liquidity in global capital markets.

S&P says in a new report that even in the GCC region, where most governments have significant fiscal and external buffers to weather the effects of the low oil price, the decline could still result in “a drop in confidence” and a decrease in sukuk issuance.

Sukuk had a record year in 2014, with global issuances reaching $116.4bn compared with $111.3bn the previous year. It was the second-highest year in terms of issuance since 2010.

Despite the risks facing the market, S&P does forecast that global issuance will exceed $100bn in 2015.

The agency also forecasts there could be more new sovereign issuers in 2015, which could include Tunisia and Egypt.

Both North African countries have announced plans to issue sukuk, but have not issued anything as yet.

There is an increasing trend for sovereigns in the Middle East and North Africa (Mena) region to turn to the sukuk market as a means of diversifying their funding sources, as well as setting a benchmark for the development of their respective Islamic finance markets.

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