Fitch Ratings: Formosa sukuk could help GCC issuers diversify funding

Fitch Ratings-Dubai/London-03 March 2020: The expansion of Taiwan's Formosa bond market to include sukuk instruments could help Gulf Cooperation Council (GCC) issuers, including Islamic banks, to diversify their funding and widen their investor pool without increasing currency risk, Fitch Ratings says.

The ability of GCC issuers to tap the Formosa market for sukuk could boost the overall global sukuk market, although it will take time for investor appetite to develop, and issuance is restricted to investment-grade issuers.

The Formosa bond market is nearly entirely US dollar-denominated, making it a good fit for GCC issuers given that GCC currencies are pegged to the dollar. It is also large relative to GCC local sukuk markets, which could benefit sukuk pricing and liquidity if Formosa sukuk grows in popularity. The Formosa bond market had about USD175 billion of outstanding debt at 25 February 2020, compared with total GCC local-currency sukuk of about USD100 billion, and a total global sukuk market of about USD500 billion. The Taiwanese initiative could also boost sukuk's recognition among global investors, which could help to tighten the pricing of sukuk relative to bonds.

The Formosa sukuk market was launched in 2019 after Taiwan's regulators announced guidelines allowing foreign borrowers to issue sukuk denominated in currencies other than the New Taiwan dollar. These instruments can be sold to local insurers, banks and professional investors, as well as internationally. Qatar Islamic Bank was the first institution to enter the market, issuing a USD800 million sukuk in January 2020. This has a five-year maturity, was issued under the bank's senior unsecured trust certificate issuance programme (rated 'A' by Fitch) and is listed on the Taipei stock exchange.

Link to Infogram: Formosa Bonds Outstanding - GCC Countries