The Gulf public primary debt market will restart, and possibly very soon. When it does it will be the time for sukuk to show once again its attractiveness to issuers in a time of market stress.
The vast majority of Gulf Co-operation Council issuers have the ability to print sukuk, and many do alongside regular bond issuance. Last year, 42% of Middle East dollar and euro public, benchmark sized issuance was in sukuk, according to GlobalCapital’s Primary Market Monitor.
It has proven in the past to be a safe haven market for issuers. It is undersupplied meaning sukuk demand, led by Gulf banks, is less sensitive about pricing than international investors are. And those investors have a lot of cash, something the war in the Middle East is not going to change much.
The Gulf has faced an unprecedented crisis, with Iranian missiles and drones striking daily during March and early April. Iran has closed the Strait of Hormuz for the first time, choking off GCC oil exports.
Oil prices may have risen, which would usually bolster GCC balance sheets and reduce the need for dollar funding. But the sea lane closure means most Gulf nations are not benefiting as much as usual from the higher prices.
They will need to borrow in international markets, perhaps more than planned at the start of the year, to fill wider budget deficits and to pay for infrastructure repairs.
Conventional bond markets may be open, but international investors will demand a premium because of the security risk.
Domestic investors, who form the bulk of sukuk demand, will not demand so much and will be keen to support their governments, banks and corporates.
If there was ever a time for the Islamic finance market to show its strength and resilience, this is it.