Sukuk issuance in Saudi Arabia to stabilize in 2019

Sukuk issuance in Saudi Arabia is expected to stabilize in 2019, Mohamed Damak, senior director & global head of Islamic Finance at S&P Global Ratings, told Argaam in an exclusive interview.

“We continue to expect sukuk re-opening to support the overall issuance volumes,” he further elaborated in the interview.

Here are the excerpts from the interview:

Q: How will the slowdown in the global sukuk market affect the GCC sukuk issuance in 2019?

A: GCC issuances totaled $46 billion in 2018 as compared to $48 billion in 2017. We think that few factors will shape the market performance in 2019.

This includes global liquidity and the amount that will continue (or not) to be channeled to the GCC; the fact that geopolitical risks remain high and the impact it has on investors’ appetite; and the oil price and whether we will see lower (higher) oil price compared with our $55 assumption.

A lower oil price will result in higher financing needs and it remains to be seen if GCC issuers will go the sukuk route or the conventional route (easier to implement).

Q: With fluctuating oil prices and OPEC’s decision to cut supplies, what effects will be seen on the GCC sukuk market in 2019?

A: We assume an oil price of $55 in 2019. A lower oil price will result in higher financing needs for the GCC countries; all else being equal and potentially higher issuances (conventional or Islamic).  

Read: GCC sukuk issuances set to rise in 2019: S&P

Q: The shift in Saudi Arabia’s power structures and societal norms has attracted a lot of attention from investors. Will there be a slowdown in the Kingdom’s sukuk issuance?

A: The slowdown already took place in 2018. The total issuance out of Saudi Arabia reached $19.6 billion in 2018 compared with $31.8 billion in 2017. The drop is even higher if you exclude sukuk re-opening.

Q: Do you expect to see any major trend in the Saudi sukuk market in 2019?

A: Under our base case scenario, we assume that sukuk issuance will stabilize in Saudi in 2019 or drop slightly. We continue to expect sukuk re-opening to support the overall issuance volumes.

Q: What effects will the expansionary 2019 budget of Saudi Arabia have on the sukuk market?

A: The government financing needs will depend on oil prices primarily and the decision to tap conventional or sukuk market. Private sector issuances might be supported if we see higher government investments.

Read: Saudi Arabia closes SAR 7 bln domestic sukuk issuance

Q: What are the structural challenges that need to be addressed in the Saudi sukuk market?

A: One of the key challenges is related to the use of the Murabaha-Mudharaba structure. This structure is based on two legs, including one loss absorbing leg and it would help the market to clarify if the profit of the Murabaha is protected from any potential loss on the Mudharaba and how this will be dealt with in case of legal action.

Q: What are your expectations from the GCC sukuk market in 2019?

A: We expect the sukuk issuance in the GCC to stabilize at best or decline in 2019. Our assumptions for the base case scenario are underpinned by an increase in issuance volume in all the countries except the UAE where we might see a slight drop (as most of last year performance was due to front loading of issuances by UAE private sector issuers).

In our stressed scenario, we assume a drop of issuance in all the GCC countries. 

Write to Paromita Dey at paromita.d@argaamplus.com