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Double digit growth expected in Gulf sukuk issuance

Dubai: Demand for sukuk by corporate and infrastructure issuers in the Gulf is likely to continue growing at a double-digit pace in the year or two ahead, despite weakness globally in the past year.

Issuance in the GCC grew a solid 11 per cent in the year to September 24, 2013, to reach $14.8 billion. By contrast, volumes decreased about 25 per cent in the period in the world’s biggest country of issuance, Malaysia.

One of the main factors that continued to support GCC corporate and sukuk issuance during the first half of 2013 was low yields on average, because many GCC issues are denominated in US dollars and are, therefore, sensitive to changes in Fed policy. Other factors included some improvement in the perceived credit quality of sukuk, arising from better economic conditions and higher oil prices, the continued need for infrastructure finance, and calls by GCC governments (in particular Dubai) for greater Islamic issuance by corporate and infrastructure entities.

“The drivers for sukuk in the coming years in the GCC are likely to be refinancing requirements, the vast government programmes for building out the infrastructure, and tighter global and local regulation of banks that could dampen their issuance,” said Karim Nassif, Standard & Poor’s credit analyst.

Investment in power, water

Infrastructure plans include much-needed investment in power and water, expansion related to events like the Fifa World Cup in Qatar in 2020, and corporates aiming to diversify their sources of funding with the aim of supporting the development of Islamic finance in the region.

Analysts say in the tougher regulatory environment, issuers are likely to turn to alternative sources of funding in the capital markets, with corporate and infrastructure entities in the Gulf favouring sukuk.

Malaysian volumes for full-year 2013 could fall short of 2012 levels, however, on the back of one of the market’s slowest periods in the third quarter. The first half of the year already saw a 53.5 per cent drop in corporate issuance from first-half 2012.

“Yet, since the US Federal Reserve announced that it would delay the tapering of quantitative easing, yields dropped and we are seeing an uptick in investor interest in sukuk that companies are proposing to launch — in the GCC as well as Malaysia,” said Nassif.

In Malaysia, government issuance accounts for about 65 per cent of volumes, complemented by issuance from the power, utilities, manufacturing, and financial services sectors.

In Asia, the Asian Development Bank projects infrastructure spending at more than $8 billion over the next 10 years. Countries like India and Indonesia have some of the largest infrastructure development plans in the region, and China plans to spend about 9 per cent of its GDP on average for infrastructure. In the meantime, regulators in Asia are looking at how to facilitate growth of the sukuk market.

Hong Kong passed an ordinance in July to create a “level playing field” for sukuk. The huge demand for finance and the growing popularity of Islamic finance as an investable asset class among fixed-income investors in Asia, we believe, is likely to improve the supply-demand dynamic of sukuk in the region.