Sukuk issuance in MENA is expected to outpace bond issuance in 2016 (as against a 38 per cent decline in sukuk in 2015) primarily due to still abundant liquidity in that market as against tight liquidity with conventional banks. Also supporting the expected issuance is the oil price-led fiscal deficit gap and the need to invest in infrastructure by the sovereigns a research report from the Kuwaiti investment company said.

The year 2015 saw higher issuances by sovereigns led by Saudi Arabia which tapped the market after an eight-year hiatus. 'However corporate issuers in the GCC pulled back from the bond market resulting in a decline of almost 22 per cent in this segment during 2015. For 2016 Saudi Arabia has already announced that it would tap the international bond market to plug the expected budget deficit during the year. In addition the excellent credit ratings of the GCC sovereigns should make their fixed income issuance attractive to investors globally' the report said.

'On the international front a process of normalisation was finally initiated in December when the US Federal Reserve raised benchmark rates after almost eight years of a zero-rate policy. However the initial response to the rate hike by the year-end was a flattening yield curve. Short-term interest rates saw an upward trend by year-end reflecting the increase in Fed benchmark rates. On the other hand long-term interest rates are yet to see the same pace of increase in response to the benchmark rate hike which points towards a lack of confidence in the long term growth of the US economy. This has raised concerns of an 'inverted curve' or recessionary pressure in the long run' Kamco said.

In fact in 2015 the yield on the two-year US Treasury note posted the biggest yearly rise since 2006. A number of factors were responsible for this including a steep decline in oil prices recurring concerns of slowing global growth with continued slowdown in Europe a bumpy landing expected in Chinese economy as well as the yuan devaluation in August 2015.

The trend in the global sukuk and MENA fixed-income indices highlight the divergent trends in these markets and clearly reflects the weakness in sukuk issuances during 2015. The sukuk market got a boost as sovereigns continued to diversify their funding sources and the trend is expected to be stronger in 2016.

Total bond issuance in the MENA region touched US$105.7bn during 2015 a strong leap of 67 per cent or US$42.3bn as compared with the previous year.

The bond market outlook for 2016 largely shows a grim picture with a majority of the fund managers expressing a more bearish view for the overpriced bond market as compared to compelling valuations for equity markets. The rate hike decision in Saudi Arabia Kuwait and Bahrain following the US rate hike has pushed up short-term interest rates and reduced bond yields thereby resulting in shrunken buying for Gulf bonds.

'Going forward we expect sukuk issuance to pick up owing to several factors and government issuance is expected to dominate the market' the Kamco report said.