Wealth management across the globe has been grappling with numerous challenges amid the uncertainties affecting the world. However, the banking services in the Middle East, particularly in the Gulf region, are experiencing a renaissance as they witness a resurgence in business activity.
The Gulf region has become a magnet for private foreign investment banks, seeking to capitalize on the current market opportunities, particularly in Sukuk issuances. With ongoing structural reforms, a surge in foreign direct investments, a thriving debt and capital market, and the initiation of major projects, the economic fundamentals are gaining strength. These favorable factors present abundant business opportunities for investment banks to explore and capitalize on.
According to S&P Global Ratings’ estimates, the total global issuance of Sukuk bonds is expected to range between $160 billion and $170 billion this year, surpassing their earlier projection of $150 billion. Notably, S&P has identified several Gulf issuers that are ready and eagerly awaiting the opportune moment to launch their Sukuk offerings.
As a result, numerous major global lenders have decided to establish a foothold in the region by setting up branches, with Dubai and Riyadh emerging as the most common destinations. Their objective is to secure a pivotal role in the upcoming phase, recognizing that the region holds immense significance for any private bank aiming to advance their operations. Concurrently, governments are listing their subsidiaries on local financial markets or divesting portions of them, while private companies are issuing large Sukuk offerings that exceed expectations.
A report by the Kuwait Financial Center, also known as MARKAZ, reveals that the stock markets in the Gulf Cooperation Council countries successfully raised $3.5 billion through 12 initial public offerings during the first quarter of 2023, with the United Arab Emirates contributing a substantial 91 percent of the total amount raised.
According to a recent report by Ernst & Young on global IPO trends, Abu Dhabi emerged as a significant player in the first quarter of 2023, with its listed companies accounting for 14 percent of the total worldwide. The UAE stock markets experienced substantial growth during the same period, attracting over $3 billion in listing proceeds and securing the third position globally.
PricewaterhouseCoopers has identified Saudi Arabia as an attractive market for global companies seeking merger and acquisition opportunities. This is primarily due to Saudi Arabia’s ambitious goals set forth by Vision 2030, coupled with the government’s increased focus on enhancing the private sector.
The Kingdom aims to further boost the private sector’s contribution to its economy to 65 percent by the 2040s, highlighting its commitment to economic diversification and development.
Furthermore, Egypt has taken significant steps toward bolstering the role of its private sector and attracting foreign investment. The government recently finalized contracts to sell state-owned assets worth $1.9 billion through a government-led IPO program.
To address the demands of the International Monetary Fund and secure a $3 billion loan approval in December, the Egyptian government announced its plan earlier this year to sell stakes in 32 state-owned companies to private sector investors.
Notably, Egypt successfully tapped into the Sukuk market for the first time, issuing its inaugural sovereign Islamic Sukuk with a value of $1.5 billion in February of the previous year. The offering garnered significant interest, with the subscription value reaching approximately $6.1 billion, reflecting an oversubscription rate of over four times.
The Middle East experienced a substantial surge in IPOs in 2022, raising over $23 billion in total value – the highest figure since 2019 when Saudi Aramco’s IPO made history by raising $29 billion.
S&P forecasts continued momentum in the foreign currency Sukuk market throughout the second half of 2023. The rating agency highlights that numerous issuers in the Gulf region are actively exploring opportunities presented by this market, aiming to capitalize on the current favorable interest rate environment. This projection assumes that central banks have not completed their measures to combat inflation and further interest rate hikes could be looming on the horizon.
Surplus attracts investments
GCC countries celebrated a remarkable achievement in 2022, recording a surplus of 3.5 percent of their GDP, the first surplus since 2014. This development aligns with their strategic efforts to diversify their economies, reducing their dependence on oil. The recent surge in oil prices has played a significant role in strengthening their financial reserves and providing funds for their economic diversification initiatives.
Among the GCC nations, Saudi Arabia stood out with an impressive growth rate of 8.7 percent in 2022, making it the fastest-growing economy among G20 countries. Likewise, the UAE experienced substantial GDP growth of approximately 7.6 percent, marking the highest growth rate in 11 years.
Despite facing global economic challenges, the region has managed to sustain its growth momentum. The IMF forecasts a growth rate of 2.9 percent for the Middle East and North Africa region in 2023, with further expansion expected to reach 3.5 percent in 2024.
This positive economic outlook positions the Middle East as an attractive destination for investments. The region has emerged as a bright spot for IPOs, as witnessed last year, and this trend continues. Notably, several companies have been listed on the stock exchanges of Saudi Arabia and the UAE during the first half of this year.
The GCC economies have shown resilience in recovering from the economic slowdown caused by the COVID-19 pandemic. This rebound can be attributed to effective government stimulus measures, ongoing spending on infrastructure projects, and significant developments that have boosted economic activity.
Bank of America acknowledges the sustained interest of foreign investors in Middle Eastern IPOs. While they anticipate a positive trajectory, they do not expect a massive surge in the second half of this year. Instead, many operations are likely to occur early or mid-next year.
Moreover, companies in the Middle East display optimism regarding the regional structural transformation. This entails a commitment to developing and uplifting capital markets, supported by financial backing from local entities.
Bonds and sustainability
The region is experiencing a surge in sustainability-linked Sukuk, commonly known as green Sukuk, which are tied to renewable energy and other environmentally friendly assets, alongside traditional bonds. Among the Gulf countries, there is a promising potential for green Sukuk in solar energy projects, contributing to sustainable development through renewable energy sources.
This particular type of Sukuk has witnessed remarkable growth recently, largely influenced by the increasing awareness of environmental, social, and governance factors among issuers. In the first half of 2023, the total volume of green Sukuk saw an impressive increase of approximately 50 percent compared to the previous year. As investor awareness and interest rise, issuers are expected to offer larger Sukuk sizes to meet the growing demand. Additionally, core Islamic finance countries are taking proactive steps to reduce their carbon footprints.
According to estimates by the Arab Monetary Fund, the overall value of green bond and Sukuk issuances from Arab countries, both by sovereign and private sectors, reached $5.5 billion in 2022. The forthcoming COP 28 conference in the UAE is anticipated to shed further light on the vast opportunities presented by Islamic finance and Sukuk in financing climate-related initiatives.
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