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Report says rising sukuk issuance from the corporate and infrastructure sectors could buoy the Gulf’s capital markets

Growth in issue volumes in the Gulf’s capital markets in 2014 will likely be steady versus the 2013 rate, although low yields could ultimately push up issuance. This is according to a report card Standard & Poor’s Ratings Services published today, titled ” Increasing Corporate And Infrastructure Sukuk Issuance Could Lift The Gulf’s Capital Markets.” We see the capital market issues in the region so far this year as evidence of robust demand.

Low interest rates, generally positive economic fundamentals, the implementation of regulation to support capital markets, mounting demand for Islamic finance, and the continued need for infrastructure investment in Gulf Cooperation Council (GCC; Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and UAE) countries should fuel capital market growth, in our opinion.

“Corporate and project finance entities will remain innovative in their funding solutions,” said Standard & Poor’s credit analyst Karim Nassif.

“This was demonstrated by landmark issuances in the infrastructure space last year, such as those of Ruwais Power Company and Sadara Chemical Company, as well as Majid Al Futtaim’s perpetual hybrid securities.”

“Strong investor demand has allowed issuers to tap markets at record low coupon rates and extend debt maturity profiles. This has helped improve their financial credit profiles,” added Standard & Poor’s credit analyst Tommy Trask.

We forecast 5% GDP growth on average in the Gulf in 2014 on sustained high oil prices. Moreover, we believe issue volumes in GCC capital markets are likely to stay stable or strengthen slightly this year, depending largely on interest rate developments. We also see mounting demand for sukuk issuance, with some governments aiming to establish Islamic finance hubs. That said, we believe the major risks continue to be an escalation in regional political instability or an unexpected drop in oil prices.

Overview
• We forecast 5% GDP growth on average in GCC countries in 2014, on sustained high oil prices.
• Issue volumes in GCC capital markets are likely to stay stable or strengthen slightly this year, depending largely on interest rate developments.
• We see mounting demand for sukuk issuance in the Gulf, with some governments aiming to establish Islamic finance hubs.
• The major risks continue to be potential escalation in regional political instability or an unexpected drop in oil prices.

Under Standard & Poor’s policies, only a Rating Committee can determine a Credit Rating Action (including a Credit Rating change, affirmation or withdrawal, Rating Outlook change, or CreditWatch action). This commentary and its subject matter have not been the subject of Rating Committee action and should not be interpreted as a change to, or affirmation of, a Credit Rating or Rating Outlook.