Corporate and infrastructure issuers in the Gulf region may increasingly rely on Islamic bonds (sukuk) as a source of funding in coming quarters, Standard & Poor's Ratings Services said on Monday.
Sukuk issuance in the GCC has peaked so far in 2012 at more than $19 billion following a lull in activity between 2009 and 2011. Not only has sukuk issuance in the first nine months of the year surpassed total issuance for full-year 2011, it also exceeded conventional bond issuance for the first time.
Sukuk issuance in Gulf Cooperation Council countries (GCC) has reached a record high this year, propelled by positive developments in the region's economy and capital markets, S&P said in a report titled “Sukuk are surpassing conventional bond issuance in the Gulf countries as Yields Tighten."
Yields have fallen dramatically on both conventional and sukuk capital market issuance in the past year. This trend was supported by the GCC financial system's sound liquidity, local investors' strong appetite for debt, and accommodative monetary policies around the world.
"As access to capital markets widened, several corporate issuers in the region were able to successfully refinance large amounts of debt falling due, notably by tapping the sukuk market," said Tommy Trask, S&P Credit Analyst.
"We also expect the project finance sector, including real estate and transport projects, to increasingly rely on sukuk issuance to fund transactions," said S&Ps Credit Analyst Karim Nassif.
“We believe the future of Islamic finance will be centered around the GCC and Asia, which are likely to fuel global economic growth for decades to come. Both regions face large infrastructure development needs, and in our view finance in this sector is a good fit with Shariah principles, since infrastructure financing is asset-focused. Furthermore, creating an investment culture in infrastructure assets within each region could boost cross-border sukuk trading, which, in turn, could help harmonize Islamic finance globally,” S&P analysts said.
Overall, rising oil prices have led ratings agency’s economists to revise their GDP growth forecast for the GCC for 2012 to five per cent from four per cent, and created a fertile environment for credit growth, particularly in the Gulf's oil-exporting economies. However, tough global economic conditions and continued political tension in the region following the Arab Spring should remain key challenges over the coming months.