Sukuk Beats Conventional Bonds

Corporate and infrastructure issuers in the Gulf region may increasingly rely on sukuk, the Islamic equivalent of bonds, as a source of funding in coming quarters says a report titled “Sukuk Are Surpassing Conventional Bond Issuance in the Gulf Countries as Yields Tighten,” published by Standard & Poor’s Ratings Services.

Sukuk issuance in Gulf Cooperation Council countries (GCC) – comprising Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and United Arab Emirates – has reached a record high this year, propelled by positive developments in the region’s economy and capital markets.

Yields have fallen dramatically on both conventional and sukuk capital market issuance in the past year. This trend was supported by the GCC financial system’s sound liquidity, local investors’ strong appetite for debt, and accommodative monetary policies around the world.

“As access to capital markets widened, several corporate issuers in the region were able to successfully refinance large amounts of debt falling due, notably by tapping the sukuk market,” said Standard & Poor’s credit analyst Tommy Trask. “We also expect the project finance sector, including real estate and transport projects, to increasingly rely on sukuk issuance to fund transactions,” said Standard & Poor’s credit analyst Karim Nassif.

Overall, rising oil prices have led Standard & Poor’s Ratings Services’ economists to revise their GDP growth forecast for the GCC for 2012 to 5 percent, from 4 percent previously, and created a fertile environment for credit growth, particularly in the Gulf’s oil-exporting economies. However, tough global economic conditions and continued political tension in the region following the Arab Spring should remain key challenges over the coming months.

The Saudi Gazette