It was a challenging 2020 for the Islamic syndicated financing sector but the anticipated COVID-19 vaccine and stabilization of oil price is expected to aid recovery in 2021.
Review of 2020
Global economic activity slowed down in 2020, driven by the lockdown and uncertainty led by the COVID-19 outbreak. In the Middle East, North Africa and Turkey region, new syndicated loan volume contracted around 31% to US$73 billion year-to-date 2020 versus US$106 billion in the 2019 financial year, with total GCC loan volume contracting about 38% to US$48 billion against US$77 billion over the same period.
There was also a significant slowdown in overall Islamic finance volumes in 2020. According to S&P, the global Islamic finance industry is expected to show low-to-mid-single-digit growth in 2020-21 as compared to 11.4% in 2019. Due to rapidly changing market conditions, there has been a preference from some sovereigns, government-related entities (GREs) and corporates for conventional loans primarily owing to the relative ease and speed of structuring, documentation and execution; this was evident via the significant contraction in global Islamic syndicated loan volume, which decreased around 71% to US$8 billion year-to-date 2020 versus approximately US$28 billion in the 2019 financial year.
GCC borrowers continue to be the majority contributors of the global Islamic syndicated financing volume (primarily driven by Saudi Arabia at 54% and the UAE at 28%), however, Islamic financing continue to represent a considerably low share of the overall GCC loan volumes at about 16.7% year-to-date 2020 and 36.7% in 2019.
Saudi Arabia remains the largest contributor to Islamic financing in 2020 albeit driven from a small number of mega deals including the US$2.4 billion by Saudi Electricity Company, US$2.3 billion by Ma’aden Phosphate, and US$1.6 billion by Zain KSA; followed by the UAE, Egypt, Turkey, Qatar and Kazakhstan.
The Arab Republic of Egypt raised its debut syndicated US$2 billion conventional and Islamic financing facilities; the facility was more than 75% oversubscribed, and incorporated the first widely syndicated dual Murabahah structure, which shall pave the future course of Murabahah financings in the country.
Kazakhstan completed its largest non-oil and gas infrastructure development financial institution-backed US dollar-denominated financing of US$585 million for its Almaty Ring Road project (BAKAD), which incorporated European Bank for Reconstruction and Development and Eurasian Development Bank financings, and a US$100 million 14.5-year Murabahah financing from the IsDB. There was a sharp decline in Islamic financing volume in the financial sector at circa US$1.3 billion year-to-date 2020 against about US$7.8 billion in 2019, primarily as a result of the strong liquidity dynamics of GCC banks, and the significant stimulus packages announced by a number of the regional governments in light of COVID-19.
Preview of 2021
We see further financing requirements from sovereigns and GREs in MENA in 2021, and whilst the respective borrower class focused on conventional borrowings in 2020, we expect them to diversify their funding sources via competitive and readily available Islamic liquidity.
We see significant liquidity in the GCC banking system, Islamic banks and the Islamic arms of local/regional banks currently stand strongly positioned for 2021. An improvement on the economic front and potential requirement for new capex financing is therefore likely to result in an increase in Islamic corporate financings in 2021. On the other hand once the stimulus packages wear off some corporates will also look at restructuring and refinancing. We expect to see longer tenors in certain sectors such as hospitality and real estate.
In 2019 and 2020 we saw several issuers issue Sukuk in ESG (environmental, social and governance) format and we expect in the near future Islamic syndicated financing as well to be structured in green/social/sustainable format.
2020 was a challenging year in which for the first time we had to deal with the economic fallout resulting from a pandemic. We have seen strong improvements in the financial markets and the economy in the last quarter and remain optimistic about 2021. We believe the Islamic syndicated financing volumes are at a trough and the expected COVID-19 vaccine, the stabilization of oil price and a recovery of growth are likely to result in significantly higher volumes in 2021.
The views expressed herein are those of the author and do not necessarily reflect the official policy or position of any other agency, organization, employer or company.
Hitesh Asarpota is the managing director and head of Loan Syndications & Debt Capital Markets at Emirates NBD Capital. He is also the chair of the Gulf Bond and Sukuk Association. He can be contacted at [email protected]