Dubai: Gulf Cooperation Council (GCC) countries’ higher borrowing needs are expected drive higher sukuk issuance in the near term from the region according to rating agency Moody’s. “Large borrowing needs will continue to fuel sukuk issuance across the GCC. The oil price shock led to a significant deterioration in the fiscal and external accounts of GCC sovereigns, turning their surpluses into large deficits. As a result, their aggregate gross borrowing requirements spiked in 2015 and we expect will remain high at an estimated $148 billion (Dh543 billion) in 2018, prompting higher debt issuance,” said Christian de Guzman, a Moody’s Vice-President and Senior Credit Officer.
The GCC countries initially drew on foreign exchange reserves and government deposits in the banking system to finance their external and fiscal deficits before turning to capital markets. Conventional debt instruments were initially favoured, especially by sovereigns that had been absent from capital markets. The funding mix is now being diversified towards a more balanced combination of conventional and Islamic instruments reflecting cultural affinity with the sector and supportive of governments’ respective Islamic finance agendas.
Saudi Arabia is likely to strengthen its position in the sukuk market. As the largest GCC market, accounting for more than half of the region’s sovereign gross borrowing requirements in 2018, Saudi Arabia leads regional sovereign sukuk issuance. After a $17.5 billion Eurobond, the authorities issued an inaugural US dollar-denominated international sukuk in April this year. The government sold dual tranche notes with five- and 10-year tenors worth $4.5 billion each, raising $1 billion more than planned. The issuance was oversubscribed with $33 billion in bids for the paper.
In July the government tapped the domestic market for the first time by issuing sukuk worth SAR17 billion (around $4.5 billion, Dh16 billion), followed by another domestic SAR13 billion ($3.5 billion, Dh12 billion) issuance, both oversubscribed. This brought Saudi Arabia’s sukuk issuance to a total of $17 billion, or 40 per cent of global long-term sovereign sukuk issued in the first eight months of the year. With Saudi Arabia’s total gross borrowing requirements estimated to be broadly stable at $76 billion in 2018, sukuk issuance will likely increase in the future. In fact, the authorities recently announced that they are considering tapping the international Islamic capital market in the first quarter of 2018.
“Government-related entities (GREs) and supranational organisations domiciled domestically, in particular the Islamic Development Bank, have been active issuers of Islamic finance instruments in the past, a trend which we expect to continue in the coming years,” said Guzman.
Other GCC countries have increased their market presence. In May this year Oman issued a $2 billion dollar-denominated sukuk, a significant increase from the $500 million issued last year and OMR250 million ($647 million, Dh2.3 billion) in 2015, when it entered the sukuk market for the first time. Qatar has been a regular issuer of sukuk papers since 2010, accounting for half of total sovereign sukuk issuance in the GCC between 2010 and 2016. After relatively muted issuance in the past two years, the volume of Islamic funds raised by Qatar more than doubled in the first eight months of this year to an equivalent of $3.7 billion.
Kuwait is the only GCC sovereign that has yet to tap the sukuk market, although the government had announced plans to do so in 2016. If a new sukuk law is approved by parliament along with legislation to increase the sovereign debt ceiling to KWD25 billion (Dh304 billion) from KWD10 billion (Dh121 billion), analysts expect Kuwait to start issuing Islamic finance instruments.
GCC issuance is behind rise in US dollar share of sovereign instruments. Given the GCC’s currency pegs to the US dollar, rising issuance in the region drives the overall share of US-dollar denominated sovereign sukuks, up to 40 per cent of long-term issuance between January and August this year, from less than 10 per cent in 2010.
The GCC countries contributed 69 per cent of the new US dollar-denominated issuance this year. Historically, issuances originated in Saudi Arabia and the UAE have been largely denominated in dollar. Malaysia and Indonesia have also been regularly issuers of cross-border sukuk. Nevertheless, their issuance mix is dominated by local-currency instruments.
