The corporate and infrastructure sukuk issuance in the Gulf region remained muted in the first half of 2018, according to a report by top ratings agency S&P.

While the GCC region's corporate and infrastructure issuers raised over $7.6 billion via sukuk in 2017, issuance was subdued in the first half of 2018.

Five issuers raised around $2.6 billion in total, representing a 60 per cent decline relative to the $6.5 billion achieved in the first half of 2017, stated the report.

Over the past 18 months, the real estate sector dominated the number of issuances, making up 10 of the 16 issuances executed.

This is explained by the sector's need for long-term financing amid muted sales and lower risk appetite from the banking system, because of the ongoing real estate price contraction in some GCC countries, particularly, the UAE and Qatar, it added.

According to S&P, there are a number of factors at play, including somewhat diminished funding needs, as many GCC corporates continue to operate with relatively limited investment programs.

"Additionally, in light of regional and international political developments, we believe that global investors' perception of the GCC risk had increased over the past 12 months, which has convinced some sukuk issuers to hold off on potential issuance for the time being," remarked S&P in its report.

"We don't expect this stagnant picture to change much in the second half of the year. Barring any unforeseen large-sized issuance, we expect the 2018 GCC corporate and infrastructure sukuk issuance volumes to remain well below 2017 levels," he added.

The top ratings agency said the landscape remains small and undifferentiated, translating into volatile issuance patterns.

While the GCC region has a good number of Islamic banks that are frequent sukuk issuers, the number of corporate issuers that tap into the sukuk space remains small, resulting in volatile annual volumes of issuance.

"For example, over 50 per cent 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 SR11.25 billion ($3 billion) and Investment Corporation of Dubai, which raised $1 billion. We have not seen many similar-sized transactions so far in 2018," said S&P in the report.

However, the ratings agency said of late they have begun seeing a silver lining - the banks' improving liquidity.

"In 2017 and 2018 to date, we have seen a visible improvement in the liquidity of GCC banks. The stabilization of oil prices, large issuances by select sovereigns that injected the liquidity locally, and muted loan growth explain this trend," it stated in the report.

"Therefore, the banks continue to offer credit at favorable terms to GCC corporates. We do not foresee any major change in this picture over the next 12 months, since we believe that lending growth will remain muted, and local liquidity strong," it added.

S&P said despite stronger oil prices, many GCC corporates remained cautious, translating into muted investment programmes in some sectors.

"Introduction of the value-added tax, energy subsidy reforms, and other government revenue-enhancing initiatives created pressure and uncertainty for some sectors. Additionally, market participants' expectations that global and regional interest rates will continue to normalise at higher levels is also causing issuers to pump the breaks on spending," it added.-TradeArabia News Service