Gulf sovereigns may increase their issuance of sukuk, Islamic bonds, in the second half of the year to offset deficits caused by the low oil price and to pay for stimulatory spending.
An uptick in issuance would boost what has been a slowdown in sukuk issuance so far this year, says Jamil Mufti, portfolio manager at the Bank of London and the Middle East.
“The initial read was that lower oil prices would lead to a cut in infrastructure spending and therefore lower borrowing requirements,” he says. “However… although infrastructure spending has stalled for new oil and gas related projects, due to the prolonged nature of the oil price weakness, governments are trying to grow their tertiary industries to lessen their reliance on the sector.”
The extra issuance is likely to be welcomed by investors in sukuk, who operate in a market where demand tends to outstrip supply. Islamic institutions, which are the principle buyers of sukuk, are typically forbidden from buying conventional bonds, meaning they have an incentive to buy up all new sukuk issues, often holding them to maturity. A lack of secondary trading and comparatively low yields have been blamed on the supply shortage.
Mufti says the predicted rise in sukuk issuance this year “will be a welcome bout of supply but could cause some short-term weakness to the issuing sukuk curves as the supply is absorbed”.
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