Dubai: Corporates in the UAE and the wider GCC region may prefer a bond issue as tumbling oil prices could crimp liquidity in the banking system.
Banks have been struggling to match the rates that sukuk markets provide. Senior sukuk yields are at 1.5-2 per cent currently as against bank loans that cost 2.7-3 per cent, Jaap Meijer, managing director at Arqaam Capital told Gulf News.
“It is more attractive to issue Islamic bonds than borrow from banks, given the strong investors’ interest. Already sukuks continue to be popular and banks can’t really match the rates the market provides,” said Meijer.
Sukuk issuance globally reached $116.4 billion in 2014 compared with $111.3 billion in 2013, and industry participants see more issuances this year.
The major driver would be crude oil, which fell more than 50 per cent in 2014, the biggest drop since 2008 financial crisis after the Organisation of Petroleum Exporting Countries (Opec) kept the output steady to counter US shale gas, triggering.
“The fall in oil prices could prompt governments to reduce their deposits held at the commercial banks, and this could reduce the availability of credit over time,” said Meijer.
“Though this may appear as the most liquid option for the government to tap into, it does have further reaching impact on the economy as lower deposits should translate into tighter liquidity, wider credit spreads, curbing bank lending and hence putting further pressure on GDP growth versus decreasing international reserves held elsewhere that does not have the same magnitude of an effect on the economy,” Meijer said.
A senior official at the Gulf Bonds and Sukuk Association also agreed. “If liquidity would tighten some what, that would drive more potential sukuk issuers to capital markets. I’m fairly bullish on more sukuk issuances. We may even see newer issuers coming to the market, said Micheal P. Grifferty, president of The Gulf Bonds and Sukuk Association.
Meanwhile, a Thomson Reuters survey of 44 lead arrangers and 106 investors had shown considerable confidence in the market about Sukuk issuances in 2015, with forecast figures ranging from $150-175 billion globally.
“Government that choose the path of sukuk issue would find it successful reception,” said Grifferty.
Saudi Arabia, and Oman budgeted a deficit for 2015 while increasing its spending, which analysts expect may give rise to more sukuk issuances from the governments.
“One of the silver lining of lower oil prices is that there could be more sukuk issuances as countries run budget deficits, they need to finance that. Also we would see tangible progress on subsidy reforms,” Mohieddine Kronfol, chief investment officer global sukuk and Mena (Middle East and North Africa) fixed income, at Franklin Templeton said on January 14.
The GCC region produces about $200 billion of debt a year, out of which $40-50 comes to capital market, said Franklin Templeton.
“So far the governments haven’t cut back spending at all in announced budgets. Only if the oil price stays this low for a prolonged period, would we see austerity measures being announced, affecting the private sector growth. We do not expect drastic fiscal austerity in GCC, despite double digit fiscal deficits in Saudi Arabia, Oman and Bahrain, though Oman and Bahrain are most vulnerable. We find that the UAE is very comfortable in terms of reserves,” said Meijer.