Sukuk issuance to recover this year after ebbing in 2018 on high oil prices, Fitch says

GCC countries will continue to tap debt markets rather than use reserves for financing needs

Burj Al Arab lit up in UAE flag colours. Sukuk issance in the 10 largest markets of Islamic bonds fell in 2018. Leslie Pableo / The National

Sukuk issuance in 2019 is likely to recover from last year's dip as higher oil prices in the latter half of 2018 reduced the need for funding, Fitch Ratings said in a report.

“We believe that sukuk issuance is more likely to stabilise or slightly recover in 2019 than fall further,” the rating agency noted. “We expect debt issuance to constitute a larger share of GCC sovereigns' funding given reduced drawdowns from government reserves.”

The global issuance of sharia-complaint foreign and local currency bonds this year is expected to reach as much as $115 billion (Dh422.1bn), the same level of 2018, with oil prices being a determining factor of total size of sales, S&P Global Ratings said earlier this month. The total sukuk issuance from the GCC is expected to climb to $47.6bn, slightly higher than $46bn achieved in 2018.

The sovereigns in the GCC, which account for about a third of the world’s proven oil reserves, turned to debt capital markets to raise funds to plug shortfalls in the wake of three-year oil price slump that began in the middle of 2014. The price of crude, which fell below $30 in the first quarter of 2016, recovered, breaching $80 per barrel last year. They have since retreated to hover around the $60 per barrel mark.

Sukuk issuance in the 10 largest global markets of Islamic bonds fell last year following record issuance in 2017, Fitch said. It is forecasting oil prices to average $65 per barrel this year, which could support both conventional and sukuk issuance, as several oil exporting countries will need to fund budget deficits.

Refinancing deal volumes, should also increase in the GCC and elsewhere. The volume of outstanding Fitch-rated sukuk touched $100bn for the first time last year, and Fitch estimated that about 30 per cent of that is due to mature in in the next three years.

“We expect the bulk to be refinanced,” it noted.

Sovereign and quasi-sovereign conventional bonds and sukuk from Saudi Arabia, the UAE, Bahrain Kuwait and Qatar will be eligible for JP Morgan's bond indexes and Fitch said inclusion should boost investor inflows.

Last year, sukuk issuance with a maturity of more than 18 months from the GCC, Malaysia, Indonesia, Turkey and Pakistan totalled $39.8bn - a decline of nearly 30 per cent from the previous year. It was however in line with the 2012-16 average.

“We do not believe this reflects long-term trends, but it shows how issuance volumes can be influenced by the activity of individual borrowers, notably oil-exporting sovereigns,” Fitch said.

Last year's 30 per cent decline in conventional bond issuance suggests that lower sukuk volumes was mainly a function of higher oil prices in first nine months of 2018, which reduced immediate borrowing needs among some sovereigns and improved liquidity in their banking systems. The US monetary tightening has also raised borrowing costs, however, sukuk's share of total issuance was broadly unchanged at 27 per cent, Fitch said.