For the seven years of its existence the Gulf Bond and Sukuk Association (GBSA) has encouraged, both in public and privately, Gulf Cooperation Council (GCC) sovereigns to take the lead in building out our markets by raising funds. This year we are getting what we had been looking for – in spades. 

What started in 2015 with these states absorbing liquidity from domestic banking systems morphed into $17bn in cross-border issuance so far this year. This amount is likely to jump significantly as countries that have not yet accessed the market, such as Saudi Arabia and Kuwait, as well as others that have previously issued tap the market. By year’s end, observers who saw only an abyss in January when there were not two deals to rub together – okay, there were exactly two – will probably be looking back at a year of record volumes.

While the sovereign issues to date have been mostly in the conventional format, we feel that as states build their capacity to evaluate cost and risk we will see more sharia-compliant issuance. UAE emirate Sharjah started the year with a benchmark-size ijara sukuk structure and Oman came in during July with a privately-placed sukuk.

We are pleased that the states are building up their capacities to manage liabilities, an art that was mainly overlooked during the period of robust oil prices. As they do so, we think that a more strategic review will lead them to do the ground work that goes behind setting up sukuk programmes in order to benefit from the strong demand within the region and to balance out their exposure to global conventional investors.

From the investor’s point of view, we see sukuk as a means to access what are, and will remain, a number of strong credit issuers across a range of sectors. Those who bought into GCC sukuk six months or a year ago have been amply rewarded. And, some observers within the region feel that international ratings procedures in some cases don’t allow the agencies to fully reflect the obligors’ strategic importance and hence under-estimate credit strength.

We do not anticipate the strong appetite going away anytime soon so we would like to see more issuance from the region; asset prices should hold up well. Demand is anchored by regional buyers, including sharia–compliant banks but is increasingly global with strong placements into Asia, Europe and North America.

The Middle East is underrepresented in many portfolios and sukuk represent a means to diversify and get exposure to some great names that may not be very well known globally and are otherwise hard to come by. Ezdan Holding, DP World, MB Holding and Gulf Investment Corporation all chose Islamic structures this year, not out of necessity but by preference.

Think globally, act locally

GCC local currency debt markets are nascent by any standards but are increasingly coming to the fore. The states’ initial reactions to meeting their growing fiscal needs, by drawing on funds from the domestic banking systems without much structure around the process, was not a constructive strategy.

However, it is increasingly clear to the new upcoming breed of debt managers in the GCC that local resources can be mobilised sustainably if the market is developed holistically. This should start by shedding light on primary price discovery, issuing in a predictable manner and in size, developing regional investors, improving market infrastructure and making it seamless for foreign institutions to participate and add needed liquidity.

With the World Bank projecting oil prices at or below $60 through to 2020, you can rest assured that an increasing share of financing will be driven by capital markets and increasingly by sukuk.

GBSA will continue to make Gulf governments and companies aware of the benefits of accessing the capital markets and telling their stories to global and regional investors. While we represent the broad debt capital market, our platform will be open to de-mystifying sukuk and other sharia-compliant assets to enable investors to take part in this solid regional story.