Oil’s rally from a 12-year low has gone far enough to revive demand for Islamic bonds — but not so far that frequent issuers aren’t still in need of funds.
While Brent crude has climbed almost 40 percent this year, it’s still less than half the peak recorded in 2014, weighing on government revenues and economic growth in Malaysia and the Middle East. Stimulus efforts in oil-producing nations helped drive sales of Islamic bonds up 34 percent to $37.5 billion in 2016, after dropping to a five-year low in 2015, data compiled by Bloomberg show.
“The outlook for issuance is certainly positive at these oil prices because many oil-exporting sovereigns will continue to have substantial deficits,” said Mohieddine Kronfol, chief investment officer for global sukuk and Middle East and North Africa fixed income at Franklin Templeton Investments Ltd. in Dubai. “They are increasingly likely to choose sukuk as one of the options for funding.”
A two-year slump in energy markets has compelled governments in Malaysia and the Middle East to slash growth targets and boost debt sales to finance projects built in partnership with private companies. S&P Global Ratings estimates that weak energy prices will leave Gulf Cooperation Council countries with $560 billion of funding needs from 2015 through 2019. Union Investment Privatfonds GmbH sees sovereign and corporate sukuk sales from Saudi Arabia, Kuwait and Malaysia next year.
Saudi Arabia, the world’s largest oil producer, tapped the international bond market for the first time this week after recording its biggest budget shortfall since 1991 last year. It raised $17.5 billion selling conventional bonds. The government plans to invest about $400 billion in infrastructure in the next 10 years to stimulate growth and wean the economy off its reliance on crude.
The central bank of the United Arab Emirates lowered its 2016 economic expansion forecast to 2.3 percent in September, from 2.8 percent, citing fiscal consolidation and the slowdown of the country’s main trading partners. Malaysia, the world’s biggest sukuk market, cut this year’s growth forecast in January to a range of 4 to 4.5 percent, from an earlier projection of as much as 5 percent.
“Sukuk markets will become more active in 2017 as the rising refinancing needs during the 2017 to 2020 period across emerging bond markets will incentivize more issuers,” said Apostolos Bantis, head of emerging markets credit research at Commerzbank AG in Dubai. “We expect GCC sukuk activity will rise next year and there will be some first-time issuers.”
Saudi Arabian Oil Co. is working with banks to sell its first local-currency Islamic bonds, while Saudi Arabian Airlines has chosen HSBC Holdings Plc to arrange a 5 billion riyal ($1.3 billion) offering of Shariah-compliant debt. Kuwait is considering a sukuk issue, according to newspaper reports, while Indonesia’s PT Bank Syariah Mandiri plans to offer 1 trillion rupiah ($76 million) of subordinated Islamic notes by year-end.
Dubai’s Emirates Islamic Bank PJSC offered a $250 million portion of its 2021 Islamic bond in August, while Sharjah Islamic Bank issued $500 million of five-year securities last month. Malaysia’s Tenaga Nasional Bhd. and DanaInfra Nasional Bhd. also sold sukuk in October.
“I do expect more issuance to come, but this will come mainly from traditional and mainstream issuers who are already well-known to sukuk investors,” said Sergey Dergachev, a senior money manager at Union in Frankfurt, which oversees about $13 billion. “It really does not matter if oil is $25 or $47, both figures do lead to red budget deficit figures for most oil-producing countries, and pressure to finance their deficits externally.”