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

GCC issuers, including Government of Qatar, Qatar National Bank, First Abu Dhabi Bank and Arab Petroleum Investments Corporation, have increasingly tapped the Formosa bond market in recent years. This is in line with the trend to diversify funding options, with many GCC issuers issuing kangaroo, samurai and even panda bonds. GCC issuers, led by those in Qatar and the UAE, account for about 20% of total outstanding Formosa bonds.

Qatari banks have been incentivised to look beyond the GCC for funding since the economic boycott of Qatar began in 2017. Qatar's banking sector has the most diversified funding in the GCC, with non-domestic funding representing 43% of total funding at end-2019. Most of this is from depositors in other GCC countries, asset managers in Saudi Arabia and the UAE, and Asian investors.

Demand for Formosa bonds has been driven by Taiwanese life insurance companies seeking higher yields amid low interest rates. Near-term demand should remain high as insurers reinvest proceeds from maturing bonds. About USD15.5 billion of debt held by Taiwanese insurers matures in 1Q20, according to Bloomberg.

However, while overall Formosa bond market growth may continue apace, we expect the development of the Formosa sukuk market to be gradual, despite keen interest from GCC issuers. Several potentially significant sukuk issuers, including Turkey, Bahrain and Oman, are barred from the market as they are below investment-grade. Moreover, it will take time for investors to familiarise themselves with Formosa sukuk, and Taiwanese insurers' ability to invest has been reduced by regulatory moves to to limit their foreign-currency exposures.

Copyright Press Releases 2020