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THE GCC CORPORATE BOND MARKET

According to a report by ratings agency S&P, the GCC’s corporate and infrastructure bond (sukuk) market remained subdued in the first half of 2018

while GCC corporate and infrastructure bond issuers raised over $7.6 billion in 2017, the market was subdued in the first half of 2018. Five issuers raised around $2.6 billion in total – a 60 percent decline compared to the $6.5 billion issued in the first half of 2017. Over the past 18 months, the real estate sector accounted for 10 of the 16 issuances. S&P says this is explained by the real estate sector’s need for long-term finance against a background of lower prices and weaker sales, particularly in the UAE and Qatar, in addition to less appetite from the banking system.

According to S&P, there are a number of factors at play, including lower funding requirements as many GCC  corporates continue to operate with relatively limited investment programs. Additionally, in light of regional and international political developments, S&P believes that global investors’ perception of the GCC risk increased over the past 12 months which convinced some sukuk issuers to hold off on potential issuance for the time being. This picture is not expected to change much in the second half of the year and barring any unforeseen large-sized issuance S&P expects the 2018 GCC corporate and infrastructure sukuk issuances to remain well below 2017 levels”

While the GCC region has a number of Islamic banks that frequently issue sukuk, the number of corporate issuers remains small which means there is a high degree of volatility with respect to volumes. S&P notes that over 50 percent of the $7.6 billion raised by the region’s corporate and infrastructure issuers last year was driven by the activities of two issuers: Saudi Aramco, which raised SAR 11.25 billion ($3 billion) and Investment Corporation of Dubai which raised $1 billion.

Despite the gloom, S&P notes that there may be a silver lining, namely, improving liquidity in the banks throughout 2017 and 2018. This trend, says S&P, is explained by the stabilization of oil prices, large issuances by sovereign funds that injected the liquidity locally and the fact that banks continue to offer credit on favourable terms to GCC corporates. Despite this, S&P says many GCC corporates remain cautious. The introduction of the value-added tax, energy subsidy reforms, and other government revenue-enhancing initiatives have created pressure and uncertainty in some sectors. Expectations that global and regional interest rates will rise is also a concern.