GCC sukuk recovery in 2011: Moody's

The Islamic bonds, or sukuk market in Gulf oil producers is expected to remain stagnant in 2010 but will likely pick up in 2011 on the back of better global economic conditions, Moody's Investment Service said yesterday.

Like other financial sectors, the sukuk activity in the six-nation Gulf Co-operation Council (GCC) has been hit by the global fiscal distress although it picked up worldwide in 2009, a Moody's analyst said.

Khalid Howladar, Vice-President and Senior Credit Officer for Structured and Islamic Finance at Moody's Dubai, said he believed many companies in the GCC want to borrow money but the market has been hurt by crisis while local and international investors appear unwilling to invest at present.

In an interview with Emirates Business, Howladar said the GCC's sukuk market plunged in 2008 because of the September crisis but added there was a partial recovery in 2009, with the value of global issues rising to nearly $23 billion (Dh84.4bn) from around $14bn in 2008 and a record $32bn in 2007.

"It is now difficult to raise money or find investors even for sukuk… There is less money in the world now. Two or three years ago investors were coming to the GCC but they are not here any more… The year 2008 was the beginning of the crisis so the sukuk issue was not big during that year. Last year was even better despite the repercussions of the financial crisis because last year governments in the GCC started borrowing, including Qatar and Abu Dhabi. So, last year was better in terms of sukuk activity in the region," he said.

"As for 2010, the beginning has been slow because of prevailing uncertainty. Investors from abroad are not investing much here because they have their own problems at home. I think that for the rest of this year, the sukuk issue will be relatively low and quiet but I believe we will see a pick up in 2011-2012 because the market is recovering and the people's confidence is coming back."

Howladar said that during good market conditions, investors start thinking of investing rather than saving on the grounds risks will be low. He expected both sukuk and conventional bonds to record growth in the next two years.

Regarding credit tightness by banks, Howladar said he did not expect this to have a major impact on the bond market on the grounds raising money from bonds is now costly and banks are lending on short term.

"We know that banks have been forced to squeeze their credit but the problem now is that even in the bond market, the cost of financing is high. So the tendency now is to borrow for six months or one year because it is cheap. When the price falls, may be then they will go to the bond market," he said.

"Banks are willing to lend but only on a short term. They won't lend for five years but one year of six months. So, I believe 2010 will be a relatively quiet year for sukuk issue in the GCC. The problem is that investors have money but are not spending now because of the state of uncertainty through the world. By the end of the year, the investor has to invest his money somewhere.

"He simply can not keep it forever. So my expectation is that towards the end of the year, or in the fourth quarter, we will see a bit more interest by investors. In 2011 and the following year, we might see a real recovery in bond activity here."

Moody's figures showed there was a surge in sukuk issuance in Saudi Arabia last year compared with 2008 but a decline in the UAE mainly because of the establishment of a formal bond market in the kingdom. It estimated the value of issued sukuk in Saudi Arabia at around $3bn through 2009 compared with nearly $2bn in 2008. In the UAE, the value stood at about $3.1bn in 2009 against $5bn in 2008. Moody's put the sukuk value in Bahrain at around $1.8bn last year compared with less than $1bn in 2008.

"Legislative steps, such as the establishment of the Tadawul sukuk market in Saudi Arabia, are improving the prospects of sukuk becoming an attractive issuance structure, especially for local and cross-border investors," it said.

It said Saudi Arabia, the largest Arab economy, could potentially also become a major local currency issuer in the GCC, due to its potential local market size as well as funding and investment needs.

"We also believe the sukuk market has reasonable potential in other GCC countries, including Kuwait, Qatar and the UAE. These markets, together with Saudi Arabia, still lag behind in terms of sukuk issuance," said Howladar.

Moody's said it expected more activity in established markets for the issuance of sukuk, including the GCC and Malaysia.

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