The outlook for sukuk issuance in 2017 remains positive as GCC economies are expected to return to issuing sukuks to fund their deficits and tap the increasing demand of Islamic investors in the region.
Moreover, with stabilising oil prices and austerity measures in place, GCC governments will have the time to standardise policies for Islamic instruments and tap the unfulfilled global demand, KAMCO Research noted in its annual Fixed Income Report. The prospects for Mena bond issuances in 2017 also appears bright based on further funding requirement in the region by both sovereigns and corporate as well as rising interest rates that would make bank lending costlier. According to KAMCO research note, GCC fixed income market is expected to continue to grow during 2017, although pace of growth is not expected to be as strong as the sudden jump seen during 2016.
The key drivers to the increase in fixed income issuances in the GCC during 2016, which more than doubled to $66.5bn, was primarily the sovereign bond issuances by Saudi Arabia, Qatar and UAE.
Issuances during 2015 witnessed a marginal decline from the previous year as the investment cycle was more on a wait-and-watch mode in relation to the recovery in oil prices. In terms of instrument type, bonds dominated the market during 2016 while sukuk issuance took a backseat, although globally sukuk issuance was slightly higher than last year. Sukuk issuance for the Mena region declined for the third consecutive year by 25 percent in 2016, slightly lower than the 27 percent decline during 2015. On the other hand, bond issuance jumped from $42bn in 2015 to $75.8bn during 2016, a surge of more than 80 percent.
On the international front, high yield bond issuance declined for the fourth consecutive year primarily due to the decline in M&A transactions which is one of the key drivers for bond issuance. Nevertheless, we believe that the prospects for the fixed income market are brighter in 2017 owing to expectations of higher economic growth rate across key markets of US and Europe, in addition to a revival expected in the investment cycle that has was crippled for a few years now.
Saudi Arabia’s move to keep the repo rate unchanged was likely to ensure that liquidity in the banking sector was still comfortable, and to mitigate interbank lending rates from steeply rising, in our view. The Central Bank of Kuwait also guided that the move to hike rates in response to the Fed’s rate hike was to ensure the continued competitiveness and attractiveness of the national currency as a store of domestic savings. Borrowing costs for Kuwait are likely to rise by about 11 percent, according to KAMCO calculations.
However, even as overnight interbank rates rose, the 3-month interbank rates exhibited mixed trends as Saudi Arabia, Kuwait and Qatar rates rose, while the rate in the UAE declined from 1.4029 percent to 1.3336 percent, as banks would have likely released funds on softer terms.
Though some central banks have kept the lending rates unchanged in response to the rate hike in the US in order to keep the liquidity in their economies comfortable, future rate hikes would eventually reflect on in interbank rates and eventually lead to higher borrowing costs in the region.
