Of course, falling oil prices are not bad for all. They increase households’ scope for consumption and at the same time decrease companies’ production and transportation costs, which normally leads to higher profits and increased investments.
Rapidly developing economies such as China and India, which are net importers of oil, are experiencing the most obvious immediate benefits. They are able to use savings on oil imports to reduce their trade deficit, improve government budgets, reduce inflation, and redistribute money to infrastructure projects.
Blessing in Disguise
This is not the end of the rout. OPEC’s commitment to glutting the market, along with the prospect of U.S. and Iranian supplies joining it, has sparked predictions that prices could drop to $20 a barrel. OPEC recently raised its production ceiling to 31.5 million from 30 million barrels a day.
Iran, meanwhile, is gearing up to pump an extra 500,000 barrels per day onto the market as soon as sanctions are eased, which could be within months. And the U.S. Congress has just lifted the country’s 40-year export ban.
Nations that are dependent on oil revenues will therefore require immediate economic and financial reforms in 2016 to balance their budgets. One method being adopted by many Islamic states is the issuing of sharia law-approved bonds, known as “sukuk.” These bonds can be used to finance big projects such as the building of important infrastructure, including airports, and developing other natural resources.
Malaysia has been leading the way on this, banking on its burgeoning Islamic finance industry to reduce its oil earnings shortfall. It is planning to sell $1 billion to $1.5 billion of sovereign credit in 2016 on top of global Islamic bonds this year.
The Saudi Arabian government is similarly depending on both conventional sovereign bonds and sukuk to finance its budget deficit. In 2015, the kingdom issued sovereign bonds worth around 100 billion riyals ($26.5 billion) to ease the shortfall.
It’s all part of a $130 billion spending plan to diversify its economy away from oil. But to increase its share of the Islamic finance market, it will need to follow Malaysia’s lead in making the regulations clear for trading sukuk.
Many more oil exporters are turning to sukuk bonds to cover their deficits, including Bahrain, Oman, Qatar, and Nigeria, Africa’s largest oil producer. The sukuk bond market is forecast to grow by 15 percent in 2016 as a result.
The emergence of sukuk has been a significant development in Islamic capital markets for many oil-rich nations in the Middle East and Southeast Asia. Funds raised through sukuk can be allocated in an efficient and transparent way. Sukuk issuance has proven its resilience during recent periods of turbulence in global capital markets, and it is showing its potential to act as a cushion for falling oil prices for oil-rich countries.
Nafis Alam is an associate professor of finance and director of the Center for Islamic Business and Finance Research (CIBFR) at the University of Nottingham in the U.K. This article was previously published on TheConversation.com
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