GCC sovereigns aim to raise $275bn: S&P
09 Feb 2017 - 1:14
By Satish Kanady / The Peninsula
GCC sovereigns financing will need an estimated $275bn over the next three years. These countries will predominantly use debt financing, according to S&P Global Ratings.
Sukuk comprise only a small amount of total outstanding issuance, however work has been carried out by various governments over the past few years, particularly by Kuwait and Saudi, to establish the necessary legal frameworks for their issuance.
With the backdrop of weakening global liquidity, this potential source of financing could become a more attractive financing prospect for GCC governments and is an additional source of external liquidity relevant for our sovereign rating analysis.
On the liquidity decline in the GCC banking system, the ratings agency noted, the liquidity issue does not appear to have been a main factor in lower sukuk issuance over 2016.
"Some market participants believe that the liquidity drop in Gulf countries, where the majority of sukuk investors are based, explains the lower issuances volumes," said S&P Global Ratings' Dr Mohamed Damak, Global Head of Islamic Finance.
"We see liquidity in GCC as adequate in a global comparison, though, and believe that the less supportive economic environment is translating into fewer growth opportunities, which could actually encourage banks to reallocate liquidity in the bond and sukuk market, ultimately leading to an uptick in issuance volumes."
The decision to issue sukuk or bonds ultimately lies with the issuer and depends on many factors. These include the cost of issuance, the capacity of the market to absorb the transaction, the issuer's target investor base, how ready the issuer's regulatory and legal environment is for sukuk issuance, and the complexity of structuring sukuk, he said.
"We think that the latter factor is one of the main reasons behind muted sukuk issuance in 2016 and believe it willcontinue to weigh on volumes in 2017," said Dr Damak. In our view, the key to broadening the sukuk issuer base and volumes lies in market education on sukuk in Western countries and higher standardization of legal documentation and Sharia interpretation, or at least the establishment of large issuance programs, as some market participants have suggested.