Challenging economy keeps sukuk issuance volumes subdued
The relative ease of conventional bond issuance has prompted many regional sovereigns to tap the bond markets instead of sukuk markets. (Pixabay)
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Global sukuk issuance has been moderating since 2015 is expected to remain subdued this year and in 2017 according to rating agencies Moody’s and Standard & Poor’s (S&P).
The sukuk market experienced a correction in 2015 when Bank Negara Malaysia (the Malaysian central bank) decided to stop issuing short-term sukuk and switch to other instruments for liquidity management for Islamic financial institutions.
“A decision by Malaysia’s central bank to halt short-term issuance, in conjunction with challenging emerging market conditions and GCC focus on international investors, has led to subdued global issuance volumes,” said Khalid Howladar, Global Head of Islamic Finance at Moody’s.
New sukuk issuance volumes have remained subdued so far for the first half of 2016 at $40 billion. This has been driven by more challenging economic conditions in emerging markets and the Gulf Cooperation Council (GCC) desire to tap conventional liquidity from international investors, as quantitative easing has driven yields to zero or even negative rates in various markets.
The volume of issuance in the first half of 2016 was not that encouraging, particularly if compared with conventional issuance. The market is slowly accepting the evidence that the process of issuing sukuk can be painful and it has become more reticent in issuing such instruments
“We expect a flat new sukuk issuance volumes for 2016 at around $70 billion. Nevertheless, the longer term outlook remains promising as we expect rising sukuk issuance into 2017 from sovereigns, banks and corporates in the GCC, as regional financing needs continue to increase amid lower oil prices,” said Howladar.
S&P is less optimistic on issuance outlook. The rater projects total sukuk issuance this year and next year to be in the range of $50 to $55 billion compared to $62 billion in 2015.
“A government that needs money to pay civil servants or contractors will not ask them to wait for few months until its sukuk is issued. Rather, it will go to the conventional markets,” said Mohamed Damak, Director — Global Head of Islamic Finance.
Contraction in local liquidity and global liquidity too are contributing to the woes of the sukuk market. Local liquidity, in Islamic finance core markets, depends on the oil sector.
Muslim-majority countries, such as Malaysia, Indonesia and the GCC countries account for around 90 per cent of total sukuk issuance, this is expected to remain unchanged in 2017. While Malaysia has traditionally been the largest issuer by volume, the reduction in domestic issuance from the central bank, Bank Negara Malaysia, coupled with the deficit financing needs of the GCC members and their drive to promote Islamic finance, is expected to boost issuance from GCC.
Saudi Arabia, despite strong religious affinity and a very prominent Islamic banking sector, remains relatively underweight in both international and domestic sukuk volumes. Like Malaysia, the country enjoys a deep base of local investors, issuers, intermediaries and service providers.
“To date, however, the country’s potential remains unrealised, and is dominated by sizeable volumes of illiquid, private placements of sukuk. This may change as the country undergoes a very ambitious ‘National Transformation Programme,’ to reduce government reliance on oil revenues and develop the private and non-oil sectors,” said Howladar.
Moody’s expect potential issuances from Saudi Arabia and Kuwait before the end of the year could dramatically boost the annual figure.
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