There has been a split in research on whether the fall in oil prices will have a positive or negative impact on sukuk issuance. Will issuance by the sovereign boost issuance more than private sector issuance would fall due to lower liquidity? The oil price drop has been difficult for some GCC governments with fewer reserves to fall back on and Oman is one of the ones which has been affected the most and it is a good example of a potentially large new issuer.
The IMF completed its latest Article IV consultation with Oman last week and highlighted the risks of double digit budget deficits out to 2020 unless there is fiscal consolidation. The IMF describes the impact as being one of two outcomes depending on whether the reserve buffer is maintained:
“Without further fiscal adjustment, financing the projected cumulative fiscal deficit between 2015 and 2020 would exhaust fiscal buffers and raise debt to about 25 percent of GDP, or increase government debt to over 70 percent of GDP by 2020 if buffers were to be preserved.”
Using relatively simple numbers (real GDP growth continuing at a near 3-4% level and inflation staying low around 1-2%), to get a very rough estimate for the debt dy namics leading to the potential outcome described by the IMF works out to 12-13% of GDP budget deficts from 2017-2020. The gross debt rises from about 8.6% in 2015 to close to 70% while net debt ends low due to the assumption that the reserves are maintained at about 60% of GDP.
What this rough estimate is useful for doing is looking at potential issuance of sovereign bonds to finance the deficits. During the past few years, there are some government development bonds outstanding (about RO 560 million) and about RO 1,300 million in T-bills, giving a split of 30%-70% between bonds and bills in debt issuance. This could change in the future as gross debt levels rise, but assuming it doesn’t, what would be reasonable in terms of issuance volumes for government sukuk (excluding Islamic T-bills)?
If the government carried through on its impending RO 200 million debut sukuk and issued one of similar size in 2016 and increased the size by RO 25 million every other year (assuming outstanding sukuk are rolled or reissued when they mature), it would represent between 15-20% of the outstanding debt required to fund the deficits (assuming no return to $100/bbl oil or fiscal consolidation). Those levels of sukuk would fit in also with the needs of the Islamic banking system which is 4.4% as of 2014 and projected to rise according to a report from Thomson Reuters to 10% by 2018.
The difference between 10% of Islamic banking assets in 2018 (and maybe a few percentage points higher by 2020) and 15-20% of the debt is relatively minor given the very rough approximation used here to forecast the sukuk estimates (it is in the same ballpark). The impact of this volume of sukuk issuance (rising from RO 200 million total outstanding in 2015 to RO 1,350 in 2020) would be highly significant in establishing a sovereign yield curve which could benefit corporate issuance once the shock to the economy of a lower oil price passes, even if the prices do not fully recover to their $100/bbl level.
Alarimi, Fatma. “UPDATE 1-Oman plans private placement for debut 200 mln rial sukuk – report,” Reuters, May 11, 2015 http://www.reuters.com/article/2015/05/11/oman-sukuk-idUSL5N0Y21MA20150511
IMF. 2015. “IMF Executive Board Concludes 2015 Article IV Consultation with Oman,” Press Release May 5, 2015. http://www.imf.org/external/np/sec/pr/2015/pr15189.htm
IMF. 2015. Regional Economic Outlook Update: Middle East and Central Asia Department Statistical Appendix. Washington DC: IMF. http://www.imf.org/external/pubs/ft/reo/2015/mcd/eng/pdf/mreo0515st.pdf