The government of Qatar is in talks with banks about a sovereign sukuk issue, sources aware of the matter said on Monday, as the Gulf nation returns to international debt markets to shore up state finances pressured by low energy prices.

The world's top liquefied natural gas exporter is one of the richest countries per capita but, like other Gulf states, it faces a large budget deficit this year as it seeks to maintain the pace of development and significant social spending.

Bond sales, both in international and loan markets, were identified as the way Qatar would cover its QR46.5 billion ($12.8 billion) 2016 deficit, and talks are underway with a small group of banks to select arrangers for the first of these deals, according to three sources with knowledge of the talks.

The government may issue the dollar-denominated sukuk as soon as March or April, two of the sources added, speaking on condition of anonymity as the information is private.

A Qatari government source, who declined to be identified due to the sensitivity of the comments, said that while he was unaware of imminent plans for a sukuk offering, there was an expectation that something would be issued at some point.

The source added that a sukuk issue would be the most likely route, should the government issue debt, because the liquidity in the Islamic banking system was better than within the conventional banking market.

EXPECTATIONS

Should Qatar tap the debt market, it would be the first time since it priced a $4 billion two-part sukuk issue in July 2012.

Any transaction would be extremely well sought-after by international investors, given its reputation for being a savvy issuer and the high credit ratings awarded by various international rating agencies.

It would also likely be of significant size: as well as the 2012 sukuk, Qatar sold a $3 billion two-part bond in April 2009 and a $7 billion three-tranche deal in November that year - at the time, the largest ever sovereign bond sale by an emerging market nation.

A Qatar sukuk would be among the first of an expected wave of issuance by Gulf governments, which look set to borrow from the international bond market at a record pace this year to cover budget shortfalls.

Much of this could be through sukuk, with the only sovereign deal so far this year in the Gulf, by the emirate of Sharjah, in this format.

Islamic debt is regarded as more resilient during periods of volatility due to investors' tendencies to hold onto the paper. Sukuk would also allow any issuer to access both conventional and Islamic investors, important when regional liquidity has been reduced by governments drawing on their reserves.

Qatar has already borrowed $5.5 billion through a bank loan concluded earlier this month and the institutions which supported this deal are expected to be among the favourites to secure the coveted arranger mandates.

Bank of Tokyo-Mitsubishi UFJ, Mizuho, Sumitomo Mitsui Banking Corp, Deutsche Bank, Barclays and Qatar National Bank arranged the loan. – Reuters