‘Excellent future’ for Mena Islamic bonds

Abu Dhabi—The future of Islamic bonds in the Middle East and North Africa (Mena) seems “excellent” in the medium-to-long term, but lack of supply and right price is “stifling” demand and liquidity in the market, according to NBAD. Finding that oil prices will be a key determinant of sukuk returns in 2016, given their clear influence on spreads, NBAD said the uncertainty over the likely trajectory in the US interest rates, the bear market in oil, and increasing fiscal concerns across the region all contributed to a bearish tone in the market, causing many issuers to remain on the sidelines.
“We believe the future for this form of Islamic (like other Shariah-compliant) investment looks excellent for the medium-to-long term, but for the time being the lack of supply of sukuk – and at the right price – is stifling demand and liquidity in the market,” the bank said in Investment Outlook 2016 report. Although GCC (Gulf Cooperation Council) sukuk investors remain natural buyers, like other bond investors, they have tightened their credit quality criteria, and become much more “price sensitive”, also within the context of a flight to quality and adherence to the Basel III rules, it said. Last year was a very difficult one for sukuk issuance.
According to data released by Thomson Reuters Zawya, to the end of September, 2015, the GCC borrowers had only raised $5.8bn through global sukuk issuance, or 49% less compared with the same period of 2014. While the issuance patterns may differ for sukuk versus conventional bonds during 2016, the impacts on the overall universes should be marginal and returns, both absolute and relative, will be mainly determined by the differences and similarities between both products, according to NBAD.—Agencies

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