Islamic bond sales slumped 15 percent in first half of the year as political risk in the Middle East scared investors away.
Geopolitical risks from issues such as the economic boycott of Qatar by four of its regional neighbors and the reinstatement of sanctions against Iran have added to investor unease, according to a report from S&P Global Ratings.
The value of Islamic bond sales fell to $44.2 billion compared with $52.2 billion in the first half of 2017 according to data from S&P Global Ratings. The decline in foreign currency sukuk was even greater at 45 percent.
Rising interest rates in the US this year and expected rate increases next year in Europe could also mean that the flow of funds from developed markets into sukuk could start to slow, S&P said.
A high profile legal row involving UAE-based Dana Gas also raised questions about the enforceability of foreign judgments in the UAE, the credit ratings agency noted.
Although Dana Gas reached a settlement last month with the creditors committee of its sukuk, the widely reported dispute did not do the sukuk industry any favors.
“While we don’t attribute the recent drop in sukuk issuance in the GCC to the Dana Gas case, we do believe that the underlying issue is suppressing investors’ appetite for GCC sukuk,” the report said.
Saudi Arabia has been most active in regional debt markets so far this year, after raising $11 billion on international capital markets in April.
That issue was five times oversubscribed with about 15 percent of investors first time buyers of Saudi debt, according to Fahad Al-Saif, the president of the Ministry of Finance's debt management office.
“The target is to become the regional benchmark and safe haven in fixed interest markets,” he said at the time.
