low oil price impact on Gulf States and attractiveness of sukuk as sovereign financing option

In view of oil trading at $50, the oil rich countries of the Gulf are facing considerable adversity and a heightened future of challenge dealing with existing socio-economic issues or even struggling to maintain the status quo.

Emad Moustaque writes 6 January 2015 in the Financial Times (“Guest post: the Gulf nations must take advantage of low oil prices”) that these countries are seeking to sell to Asian consumers. Moustaque suggests that they should move from a dollar peg to a currency basket and in support of this move to build a sovereign yield curve and deeper government bond market. He continues:

“It would also make sense to issue short-term government debt in the current bullish bond environment rather than draw down reserves, which could instead be deployed in longer-term, higher-yielding projects (borrow short, invest long). A final piece would be to make the issued government bonds Shariah-compliant, providing much-needed short term liquidity to the growing Islamic banking sector.”

With the increase in international sukuk issuances such measures, should they be taken (and there are certainly indications some players are already taking up the proposal  — most aggressively and quickly the UAE’s Dubai) the expansion of the sovereign sukuk market in the Gulf is of more than regional interest. As the evidence indicated in the previous post of this blog buyers of such sukuk would likely range from the broader Middle East to include Asia, Europe and the US.

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