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Oil prices to hit GCC sukuk market

Oil prices to hit GCC sukuk market

DOHA: The global market for sukuk will remain at below-peak levels in 2016, Standard & Poor’s said yesterday. The ratings services expects issuance to reach $50bn-$55bn in 2016, compared with $63.5bn in 2015 and $116.4bn in 2014.

The correction started last year, mainly because the central bank of Malaysia (Bank Negara Malaysia; BNM) — the largest issuers of sukuk worldwide — stopped issuing. Excluding the BNM effect, sukuk issuance dropped by around 5 percent in 2015 from 2014, S$P said in “The Global Sukuk Market: The Correction Is Here To Stay.”

BNM’s pullback in 2015 saw total sukuk issuance shrink by 45 percent compared with the same period a year earlier. In 2014, BNM alone issued about $50bn out of total sukuk issuance of $116.4bn. We understand that BNM withdrew from issuing sukuk as they were attracting significant interest from investors across the board and not only the Malaysian Islamic financial institutions that BNM sukuk were primarily targeting. BNM has decided to switch to shorter-term instruments reserved to banks.

Te report noted oil prices will continue to take their toll this year.” Oil prices could dampen the market further if they continue to slide and push some GCC countries and Malaysia to reduce their investment spending. The drop in oil prices is also reducing deposits and therefore liquidity at banks, including Islamic banks. Governments and their related entities are among the top depositors in some of the core markets for Islamic finance, with a share of 15 percent to 40 percent for GCC banks.”

“In our view, three main factors will shape the performance of the sukuk market in 2016: monetary policy developments in the US and Europe, the drop in oil prices, and the possible lifting of sanctions on Iran,” said S&P’s global head of Islamic Finance, Mohamed Damak.

The first two factors are likely to drain liquidity from global and local markets. We think that if oil prices remain weak, some governments of oil-exporting countries in the GCC and Malaysia may have no other choice than to reduce investment spending, resulting in lower financing needs and potentially lower issuances by conventional and Islamic.