RIYADH: Global sukuk and debt capital markets in the Gulf Cooperation Council are facing varied liquidity headwinds as the ongoing conflict in Iran continues to influence investor sentiment, according to Fitch Ratings.
The agency said market conditions across GCC debt capital markets have weakened since the conflict began, with the impact varying by credit ratings, sovereign risk and sector type.
According to Fitch, the short-term impact hinges on the war’s scope and duration, while long-term effects will depend on the end of the conflict and the speed of investor confidence recovery.
Fitch uses Bloomberg’s Liquidity Assessment scores, which range from 1 to 100, with 100 indicating the highest level.
In its latest report, Fitch stated: “LQA scores have declined in most GCC debt capital markets since the war began, as well as for many sukuk issuers in Turkiye, Egypt and Indonesia.”
It added: “In contrast, many rated Malaysian, Omani, and supranational sukuk have shown resilience in their LQA scores.”
The decline in LQA scores for investment-grade sukuk has been less severe than for speculative-grade sukuk on average, highlighting a widening divergence in liquidity conditions.
Average liquidity scores for GCC US dollar sukuk dropped to 45 as of March 23, from 56 prior to the war. Comparable GCC US dollar bonds also weakened, with average scores falling to 48 from 53 over the same period, indicating broadly similar market stress across Islamic and conventional debt.
Investment-grade sukuk’s LQA has dropped to 65 from 73, while the decline for speculative-grade sukuk has been sharper, falling to 33 from 48.
By sector, corporates, infrastructure and project-finance sukuk recorded the lowest scores and steepest liquidity declines, while asset-backed, supranational and sovereign sukuk maintained the highest liquidity levels, with asset-backed instruments even posting gains.
Tony Hallside, CEO of STP Partners, said that Fitch’s analysis points to a clear differentiation in performance, with investment-grade sukuk maintaining stronger liquidity profiles than lower-rated segments.
“Sovereign, supranational and asset-backed sukuk in particular have shown the highest levels of liquidity and the lowest declines,” he said.
Hallside said this reinforces what is consistently seen in the GCC, where high-quality issuers, particularly those linked to government or strategic sectors such as infrastructure, continue to provide a strong foundation for market resilience.
Vijay Valecha, chief investment officer at Century Financial, said sukuk in the region continue to trade tighter than bonds, reflecting sustained demand from Islamic banks.
He added: “It is clearly evident that high-quality sukuks have held their liquidity well, in fact, in line with that of bonds, while that of speculative grades has declined. This implies that sovereign, supra-national and asset-backed sukuks have shown greater resilience.”
Sukuk in the “BB” and “B” categories have the lowest LQA scores among Fitch-rated sukuk globally, with the steepest declines since the war began, while those in the “F1sf,” “AAA,” “BBB,” “AA,” and “A” categories remain the most liquid, despite some deterioration.
“F1sf” is a short-term issuer default rating indicating the highest possible credit quality for short-term obligations, typically with a maturity of one year or less.
Valecha said that any slowdown in the region would materially affect the global emerging-market bond market, as the region accounts for over 40 percent of emerging-market US dollar bond issuance.
“The sukuks in the region continue to trade tighter than bonds, reflecting sustained demand from Islamic banks. Furthermore, looking at historic yield movements during similar periods, the current yield movement is well below the historic peaks,” added Valecha.
Hallside said that Saudi Arabia and the UAE continue to play a central role in anchoring the GCC debt capital markets, both in terms of issuance depth and investor confidence.
“As Fitch highlights, liquidity trends across GCC US dollar sukuk and bonds have remained broadly aligned, which reflects the depth and maturity of these markets. The scale and consistency of issuance from these two markets provide a strong pricing reference and help absorb periods of volatility, reinforcing overall stability across the region,” added Hallside.
The Fitch report further said that healthy liquidity, trading activity and diverse investor participation can help improve financing conditions for issuers and may support credit quality when underpinned by strong fundamentals.
To date, no Fitch-rated GCC sukuk has defaulted, with about 84 percent rated investment-grade.
“Historically, GCC DCMs have rebounded fairly quickly when tensions eased following previous Middle East geopolitical episodes, but the impact this time will depend on the scale and duration of the war,” added Fitch.
GCC’s resilience
In a separate report published in March, Fitch said US dollar bond and sukuk issuance in the GCC has fallen since the start of the conflict, after strong fundamentals at the beginning of the year.
Outstanding DCM reached $1.2 trillion as of March 9, up 14 percent year on year, with 63 percent denominated in US dollars.
Sukuk issuance rose to a record 41 percent share of GCC DCM volumes, with Saudi Arabia and the UAE accounting for the majority of outstanding issuance, followed by Qatar, Bahrain, Kuwait and Oman.
Hallside told Arab News that the GCC has been proactively strengthening its capital market frameworks over a number of years, and that is now supporting resilience in the current environment.
“GCC is relatively well-positioned within the emerging markets universe, given its strong credit fundamentals and high proportion of investment-grade issuance. As investors become more selective, this relative strength should continue to support access to capital and sustained interest in the region,” said Hallside.
Mohammad Nikkar, principal at Arthur D. Little Middle East, told Arab News that the “ongoing Iran conflict has paused but not broken GCC debt capital markets.”
He added: “This is not a liquidity crisis: but the structural story is more nuanced than the headline ‘issuance plunge’ suggests.”
According to Nikkar, the DCM in the GCC region is being held together by the Saudi-UAE anchor: with 84 percent of GCC sukuk investment grade, 63 percent in the “A” category, underpinned by the combined $2 trillion in sovereign wealth by the Public Investment Fund and the Abu Dhabi Investment Authority.
