Upside for sovereign sukuk issuance in countries in the GCC is limited in 2015, said Standard & Poor’s (S&P) in a report.
The rating agency said that although it expects that lower oil prices will lead to fiscal deficits in some countries in the GCC, most governments’ net asset positions will likely remain strong enough to enable their financing.
It added: “Where this is not the case, we see some potential for increased sukuk issues, but the rationale behind choosing sukuk over conventional capital market instruments remains a decision for each individual government. While keeping an eye on the likely financing mix for regional mega-projects, we continue to expect that most sovereign sukuk issues will relate to essential infrastructure projects and refinancing needs.”
GCC governments, corporations, and project finance companies comprise the bulk of the second-largest sukuk market in the world, after Malaysia. Most GCC countries are net hydrocarbon exporters. “As a result, prevailing market sentiment suggests that overall sukuk issuance goes hand in hand with oil prices, which, independent of seasonal factors, is why sukuk issuance from November 2014 has been so subdued.
“However, in our opinion, the factors behind GCC sovereign sukuk issuance are much more nuanced, and we believe that oil prices have had only little bearing. Government-related entities’ (GREs’) financing activity, the availability of large government assets, and healthy liquidity in the banking sector all limit the linkage between changes in oil prices and the potential for sovereign sukuk issuance.”
The extent and duration of the oil price fall will likely most affect the financing needs of those GCC sovereigns where expenditure side responses or liquid reserves are not available to cover fiscal deficits resulting from lower oil revenues.
“However, GCC governments are not likely to tolerate a persistent annual reduction of state assets,” said S&P. “Bahrain and Oman have weaker fiscal positions, both in terms of projected fiscal deficits and net assets at their disposal. We believe that in these two countries, debt or sukuk issuance are more likely as a source of deficit financing than for other GCC members.
Bahrain has already issued sukuk exceeding $1.1 billion in 2015, which is up more than 50% on 2014 annual issuance. The tightening fiscal positions of regional governments may also spur GRE debt issuance that can facilitate off-balance sheet financing.”