Corporate and infrastructure sukuk issuance in the Gulf region and Malaysia has continued to stagnate so far this year and this may carry over to the coming quarters, according to S&P Global Ratings.
The ratings agency said that despite the slump, essential infrastructure funding requirements, low interest rates, and investors' appetite for Islamic assets in their portfolios continue to be supportive for the world's core corporate sukuk markets.
In the GCC, corporate and infrastructure sukuk issuance totalled $2.5 billion in the first eight months of 2016, compared with $2.3 billion for the preceding eight months. Versus the same periods in 2013 and 2014, issues are down sharply from $5 and $6.5 billion, respectively, S&P said.
"Further out, we see possible brighter prospects for issuing corporate and infrastructure sukuk over the medium to long term. We estimate that Gulf government spending on projects alone - including infrastructure contracts awarded over 2016-2019 - could be about $330 billion," said S&P Global Ratings analyst Karim Nassif.
S&P noted that with some sovereigns, such as Saudi Arabia, the 2016 budget includes a capital spending allocation of about 9 percent for what the government defines as "transport and infrastructure". This compares with estimates of about $604 billion in projects (including $100 billion of infrastructure projects) that will need funding through 2019.
Corporate and infrastructure sukuk in the Gulf year-to-date came in flat versus the same period a year earlier.
S&P said the low oil price, subdued economic growth, a small number of issuers, and to a lesser extent cheap bank funding relative to the capital markets are the main reasons for the stagnation.
"We attribute much of the slowdown in corporate and infrastructure sukuk to the current low oil prices, which have affected macroeconomic fundamentals in the GCC. A number of large infrastructure projects in the GCC have either been cancelled or deferred as part of governments' attempts to control expenditures and address fiscal challenges," said S&P.
"Fewer projects have broadly meant less funding needs, including in the capital markets. Weakening bank liquidity and low interest rates might otherwise have encouraged greater reliance on capital markets, including sukuk issuance. Meanwhile, we believe that the ease of availability and better pricing of bank loans to corporates continues to curb demand for sukuk issuance," it added.
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