Continued low oil prices are unlikely to have the kind of positive effect on sukuk issuance that many in the market were predicting, according to the credit ratings agency Standard & Poors (S&P).
The agency said on Sunday that “sukuk issuance will remain subdued over the next six to 18 months” despite S&P expecting oil prices to remain low during the same period and to stabilise at US$50 per barrel from 2018 onwards.
S&P is predicting a slowdown in sukuk sales in the second half of this year, with global issuance hovering this full year in the range of $50bn to $55bn compared with $63bn last year.
Sukuk issuance in the first half of this year fell by 12.5 per cent compared with the same period last year – to $33.5bn from $38.4bn. Mohamed Damak, the global head of Islamic Finance for S&P, said that when the oil price decline began in 2014, “there were a lot of commentators who said it would be fantastic news for the sukuk market because the governments of the GCC and elsewhere will keep spending”, relying on issuance of more sukuk to finance this.
He said that $8.6bn was issued locally during the first half of this year – a 16 per cent decline on the $10.2bn last year.
At the same time, the use of traditional debt in the GCC has spiralled – increasing by 183 per cent in the first half of this year to $36.9bn compared with $14.8bn in the same period last year. The increase is the result of debt issuances by the governments of Abu Dhabi and Saudi Arabia.
The main reason that governments use conventional bonds to raise finance over sukuk is that sukuk is more complex.
“If you put yourself in the shoes of a minister of finance and you need $1bn immediately, you have two options,” said Mr Damak. “The first is to take one standardised set of documents off a shelf, put $1bn on the document and go and hit the market. That could literally take a few hours or a few days.”
By comparison, he said, sukuk transactions take longer, as even regular issuers need to identify an asset to use in a transaction, set up a structure and then gain approval that it is Sharia-compliant from scholars and lawyers.
He said sukuk issuance could be increased by encouraging standardisation of documents and structures. He also said that future issuance this year could be affected negatively by the US Federal Reserve raising interest rates, which will suck liquidity from the market.
Alternatively, issuance could be boosted by the European Central Bank embarking on quantitative easing, which means capital markets will seek investments with positive yield. Many European bonds are trading at negative yields amid negative interest rates and fallout from Brexit.
In April, the ratings agency Fitch said global sukuk issuance hit a record in the first quarter of $11.1bn – up 21 per cent on a year earlier. It said the amount issued was higher than average in five of the past six quarters. It expected a busy second quarter, ahead of a quieter third quarter as Ramadan and the summer break began. “Our expectation is for 2016 sukuk issuance to at least match 2015 issuance,” Fitch’s report said.
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