The Making of a Perfect Storm for GCC Sukuk

12th April 2016

Photo : Rory/CC/Flickr

In a contribution in the International Islamic Financial Market (IIFM) Sukuk Report, 5th Edition, Ibrahim Bitar, Head of Trading, Noor Bank provides an interesting insight into GCC Sukuk market developments during 2015. He reflects upon diverging GCC Sukuk market conditions at the start of 2015, which began strongly with new issuances being absorbed by the market. By the end of 2015 however, market conditions had changed and investors sensing the opportunity of higher returns as deposits and liquidity reduced had driven valuations to expensive levels.

GCC Government Fiscal Pressures

Article Overview

1 GCC Government Fiscal Pressures
- 1.1 Sukuk Market Struggled in Q4 2015
- 1.2 Download IIFM 5th Sukuk Report

At the start of the year, plentiful liquidity at GCC banks had driven deposit and interbank rates to excessive lows, whilst on the supply side GCC issuers chose to look at alternative financing options when sukuk issued in 2009-10 matured. The result was an increase in cash holdings due to a lack of sukuk options to invest into.

The situation changed in the fourth quarter, when fiscal pressures on GCC governments forced them to draw down on their bank deposits and then borrow from the banks for funding. The reduced banking liquidity led to an increase in interbank deposit rates to the determent of the private sector which had already been suffering from low commodity prices and an increase in non-performing loans. The drop in GCC asset prices and regional equity indices had a knock-on effect on consumer confidence who in turn reigned in spending.

Sukuk Market Struggled in Q4 2015

Three regional sukuk issued early in the fourth quarter struggled to be digested (regional issuances in Oct 2015 were: Qatar Islamic Bank 2020 , Oman Sovereign Sukuk 2020 and APICORP 2020).

Ibrahim Bitar concludes “we are likely to see a vicious cycle of lower earnings, reduced employment and less spending until an equilibrium is reached.” Read Full Article on Page 99 of the International Islamic Financial Market (IIFM) Sukuk Report, 5th Edition published March 2016.