The global Sukuk market is heading toward a correction in 2015 after the Central Bank of Malaysia (BNM)--one of the largest issuers of Sukuk worldwide--stopped issuing earlier this year, says a report published today by Standard & Poor's Ratings Services.
But as the report, titled "Global Sukuk Issuance Stalls in 2015 As Major Issuer Exits The Market," points out, BNM's move leaves the door open to issuers such as the International Islamic Liquidity Management Corporation (IILM) and the Islamic Development Bank (IDB) to step up their issuance and provide the industry with liquidity, thereby contributing to the development of an Islamic yield curve.
"In the first half of 2015, BNM's pullback saw total Sukuk issuance drop by 42.5 per cent compared with the same period a year earlier, said Standard & Poor's Global Head of Islamic Finance Mohamed Damak. "In 2014, BNM alone issued about $45 billion of Sukuk out of a total issuance of $116.4 billion.
"We understand part of the reason behind BNM's decision was that its Sukuk were subscribed to by a broad array of investors, preventing them from reaching their intended end-users (primarily Malaysian Islamic banks for liquidity management purposes). As a result, BNM decided to switch to other instruments restricted to banks."
Excluding the BNM effect, the worldwide volume of Sukuk issuance performed in line with our expectations, total issuance dropping by only 10.7 per cent, confirming that the impact of falling oil prices on recurring government spending and investment projects in core markets (namely Gulf Cooperation Council [GCC] countries and Malaysia) was limited in the first half of 2015. While we expect this trend to continue in the second half of 2015, the effect of lower oil prices on Sukuk issuance in 2016 remains uncertain. Such an effect will depend on whether there is a recovery in oil prices or whether governments in core markets decide to reprioritize their spending and avoid continuing using their reserves and tap the capital markets more aggressively to finance their spending.
Sukuk market performance in the first half of this year was also aided by returning sovereign issuers (from core and noncore markets) and large, albeit sporadic issuances from banks and a few nonfinancial companies (corporates) in the Gulf states and Malaysia.
- The Sukuk market is heading toward a correction in 2015 after the Central Bank of Malaysia (BNM) stopped issuing and switched to other liquidity management instruments.
- We have therefore revised our forecast for total Sukuk issuance in 2015 to about $50 billion-$60 billion from $100 billion-$115 billion, assuming no issuance from BNM in 2015.
- Excluding this effect, the market performed relatively well despite the decline in oil prices.
- The list of potential Sukuk issuers continues to increase, but the timing of their issuance is uncertain.
Under Standard & Poor's policies, only a Rating Committee can determine a Credit Rating Action (including a Credit Rating change, affirmation or withdrawal, Rating Outlook change, or CreditWatch action). This commentary and its subject matter have not been the subject of Rating Committee action and should not be interpreted as a change to, or affirmation of, a Credit Rating or Rating Outlook.
By Matthew Amlôt