Dubai: Fiscal deficits arising from low oil prices and funding needs for infrastructure projects are unlikely to boost sovereign sukuk issuance from the GCC region, according to analysts from Standard & Poor’s.
“We see no meaningful correlation between oil price swings and trends in GCC sovereign sukuk issuance. The strong fiscal positions of most GCC sovereigns curb the need for debt or sukuk issuance to meet financing needs for infrastructure projects or deficits,” said Benjamin J Young, a credit analyst with S&P.
Although S & P 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.
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 is why sukuk issuance from November 2014 has been so subdued.
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.
During times of high oil prices, often governments and GREs initiate large infrastructure projects, triggering demand for differing funding mix because of the large size and long duration of these projects. Corporates and infrastructure financing companies have frequently obtained funding in local and international bank markets and debt and sukuk markets. Large government backed infrastructure projects are also popular investment opportunities.
In times of low oil prices, both supply and demand side of sukuk tends to be weak. With low oil prices impacting the launch of new projects analysts expect sukuk issuances to moderate.
“With regard to project finance sukuk, we see a confidence effect at play that reinforces the relationship between oil prices and this type of issuance. If higher revenues reinforce a sovereign’s fiscal and external position, then the sovereign’s ability to continue financing complementary infrastructure expenditure should also strengthen, making these more attractive investment opportunities,” said Christian Esters, an analyst with S & P.
If the oil price decline persists over a longer period, analysts expect some of the GCC sovereigns that do not have adequate liquidity and or resources to cover fiscal deficits are likely to seek sukuk funding.
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,” said Young.
