Corporate and infrastructure sukuk issuance in the Gulf Cooperation Council (GCC) region was muted in the first half of 2018.
There are a number of factors at play, including somewhat diminished funding needs, as many GCC corporates continue to operate with relatively limited investment programs.
Additionally, in light of regional and international political developments, we believe global investors’ perception of the GCC risk has increased over the past 12 months, which has convinced some sukuk issuers to hold off on potential issuance for the time being.
We don’t expect this stagnant picture to change much in the second half of the year.
Barring any unforeseen large-sized issuance, we expect the 2018 GCC corporate and infrastructure sukuk issuance volumes to remain well below 2017 levels.
How was sukuk issuance activity in H1 2018?
While the GCC region’s corporate and infrastructure issuers raised over $7.6 billion via sukuk in 2017, issuance was subdued in the first half of 2018. Five issuers raised around $2.6 billion in
total, representing a 60% decline relative to the $6.5 billion achieved in the first half of 2017.
Over the past 18 months, the real estate sector dominated the number of issuances, making up 10 of the 16 issuances executed.
This is explained by the sector’s need for long-term financing amid muted sales and lower risk appetite from the banking system, because of the ongoing real estate price contraction in some GCC countries, particularly, the United Arab Emirates and Qatar.
What are the key drivers behind lower volumes and our expectations for the Full Year?
The landscape remains small and undifferentiated, translating into volatile issuance patterns.
While the GCC region has a good number of Islamic banks that are frequent sukuk issuers, the number of corporate issuers that tap into the sukuk space remains small, resulting in volatile
annual volumes of issuance. For example, over 50% of the $7.6 billion raised by the region’s corporate and infrastructure issuers last year was driven by the activities of two issuers: Saudi
Aramco, which raised around $3 billion, and the Investment Corporation of Dubai, which raised $1 billion. We have not seen many similar-sized
transactions so far in 2018.
Banks’ improving liquidity
In 2017 and 2018 to date, we have seen a visible improvement in the liquidity of GCC banks.
The stabilization of oil prices, large issuances by select sovereigns that injected the liquidity locally, and muted loan growth explain this trend.
Therefore, the banks continue to offer credit at favorable terms to GCC corporates. We do not foresee any major change in this picture over the next 12 months, since we believe that lending growth will remain muted, and local liquidity strong.
Relatively slow corporate capital expenditure programs
Despite stronger oil prices, we believe many GCC corporates remain cautious, translating into muted investment programs in some sectors. Introduction of the value-added tax, energy subsidy reforms, and other government revenue-enhancing initiatives created pressure and uncertainty for some sectors.
Additionally, market participants’ expectations that global and regional interest rates will continue to normalize at higher levels is also causing issuers to pump the breaks on spending.
International investors’ perception of the GCC risk as increasing
Over the past 12 months, there were various global and regional political developments, which we believe reduced international investors’ appetite for GCC issuance.
These include the recent reinstatement of U.S. sanctions on Iran, the continued animosity between Iran and some of its GCC neighbors, and the boycott of Qatar by a group of Arab states.
We also believe that increasing global trade tensions are generally not supportive of emerging capital markets, including the GCC region. Consequently, some issuers that were planning to tap the market in the first half of the year have decided to wait for the dust to clear.
Unresolved issues highlighted by Dana Gas dispute
Although Dana Gas reportedly reached a restructuring deal outside of court with its investors, the dispute acted as a wakeup call that standardization of legal documentation for sukuk issuance and Sharia interpretation is yet to happen.
Dana Gas has also highlighted the risks related to the enforceability of foreign judgment in emerging markets. We think that this will result in investors paying closer attention to the content
of legal documents in the near to medium term and having lower risk appetite for GCC issues.
While the market is talking about a few selective issuances in the second half the year, we still expect to see weaker issuances volumes relative to 2017, barring any unexpected improvement in
the global and regional economic outlook.