Dubai: Overall debt financing which includes both conventional bonds and sukuks across the Middle East and North Africa region is expected to grow during 2016 after posting a marginal growth of 4 per cent in 2015.

The growth in total issuance will be largely driven by factors such as oil price led fiscal deficits in oil exporting countries, need for liquidity management instruments for Islamic financial institutions to meet Basel III capital requirements and the relatively high level of liquidity in Islamic banks compared to tightening liquidity with the conventional banks.

In 2015, conventional debt issuance in the GCC was up by about 140 per cent versus a 22.4 per cent drop in sukuk issuance. The year 2015 saw higher issuances by sovereigns led by Saudi Arabia which tapped the market after an eight year hiatus.

“For 2016, Saudi Arabia has already announced that it would tap the international bond market to plug the expected budget deficit during the year. In addition, the excellent credit ratings of the GCC sovereigns should make their fixed income issuance attractive to investors globally,” said Faisal Hasan, Head - Investment Research at KAMCO.

Total bond issuance in the MENA region touched $105.7 billion (Dh388) during 2015, a strong leap of 67 per cent or $42.3 billion as compared to the previous year. Bond issuance activity got a boost from Saudi Arabia after the Kingdom issued bonds worth $30.6 billion as compared to no issues in the previous year. Saudi Arabia resumed issuing local currency bonds to banks in July 2015 for the first time since 2007 in order to cover budget deficits due to the fall in oil prices.

“The trend in the global sukuk index and the MENA fixed income indices highlight the divergent trends in these markets and clearly reflects the weakness in sukuk issuances during 2015. The sukuk market got a boost as sovereigns continued to diversify their funding sources and the trend is expected to be stronger in 2016,” said Junaid Ansari, Assistant Vice President at KAMCO.

Governments and government-related entities continue to be the biggest issuers of bonds in the region with total issues having more than doubled to $88.8 billion during 2015. Issues by banks totalled $13.5 billion in 2015 as against $12.2 billion during 2014. In terms of the share of total issuance, sovereign bonds accounted for 85 per cent of total issues in 2015, a much higher share as compared to 66 per cent in 2014, whereas the share of corporates slumped from 30 per cent in 2014 to merely 14 per cent in 2015.

The bond market outlook for 2016 largely shows a grim picture with a majority of the fund managers expressing a more bearish view for the overpriced bond market as compared to compelling valuations for the equity markets. The rate hike decision by Gulf countries following the US rate hike in December 2015 has pushed up short-term interest rates and reduced bond yields, thereby resulting in shrunken buying for Gulf bonds. In addition, the severe decline in oil revenues has affected deposits with local banks resulting in significantly tight liquidity conditions.

However, overall debt issuance from the region could be higher in 2016 on expected international bond issue by Saudi Arabia as indicated by the country’s finance minister. The yield on the expected bond issuance would largely depend on oil price. The yield spread over US treasuries would be much larger if oil price continues to be at low levels, but if it increase to $50 per barrel level, yields spreads could be in the range of 200-250 bps over US Treasuries.

Total global sukuk issuances declined significantly during 2015 by almost 39 per cent to $63.2 billion compared to $103 billion during 2014 as a result of volatility in rates and weakness in commodities. Nevertheless, as a percentage of global sukuk issuances, GCC’s share increased from 23 per cent in 2014 to 29 per cent in 2015.