The upside for sovereign sukuk issuance in GCC countries is limited in 2015, according to Standard & Poor's (S&P) Ratings Services.
Although S&P expects lower oil prices to lead to fiscal deficits in some countries in the GCC, most governments' net asset positions will likely remain strong enough to enable their financing.
“Where this is not the case, S&P sees some potential for increased sukuk issues, but the rationale behind choosing sukuk over conventional capital market instruments remains a decision for each individual government in the GCC,” it said in a report released last week.
While keeping an eye on the likely financing mix for regional mega-projects, S&P continues to expect that most sovereign sukuk issues will relate to essential infrastructure projects and refinancing needs.
GCC governments, corporations, and project finance companies comprise the bulk of the second-largest sukuk market in the world, after Malaysia. In S&P’s opinion, the factors behind GCC sovereign sukuk issuance are much more nuanced, and the ratings agency believes that oil prices have had only little bearing.
“Government-related entities' (GREs) financing activity, the availability of large government assets, and healthy liquidity in the banking sector all limit the linkage between changes in oil prices and the potential for sovereign sukuk issuance,” S&P said.
The ratings agency added, “Market sentiment and broader capital market trends suggest that the recent drop in oil prices will go hand in hand with generally subdued sukuk issuance from GCC sovereigns. S&P sees no meaningful correlation between oil price swings and trends in GCC sovereign sukuk issuance. The strong fiscal positions of most GCC sovereigns curb the need for debt or sukuk issuance to meet financing needs for infrastructure projects or deficits.”
It said the extent and duration of the oil price fall will likely most affect the financing needs of those GCC sovereigns where expenditure side responses or liquid reserves are not available to cover fiscal deficits resulting from lower oil revenues.
S&P considers that Oman, with a fiscal break-even oil price of US$106 per barrel last year, could be more likely to enter capital markets or turn to sukuk issuance to maintain its investment programme, rather than solely running down its more limited stock of assets.
Bahrain and Oman have weaker fiscal positions, both in terms of projected fiscal deficits and net assets at their disposal, the ratings agency said, adding, “We believe that in these two countries, debt or sukuk issuance are more likely as a source of deficit financing than for other GCC members.”
source: Muscat Daily