Global sukuk issuance raised $100.9 billion in the first half of 2022, slightly lower than the $104.2 billion issued during H1 2021, according to the 2022 Sukuk Perceptions and Forecast Study by Refinitiv.

Mustafa Adil, Head of Islamic Finance, Refinitiv, an LSEG business, said, “A new sukuk issuance record had been set in 2021 for the fifth consecutive year, reaching a total of $196.5 billion. Although this was up by 8.2% from $181.6 billion in 2020, that compares with the much greater average annual growth of 21%, in the previous five years.”

Stable outlook for sukuk in 2022, despite global headwinds

The report projects that global sukuk issuance will moderate in 2022, settling at $185 billion by the end of the year. Issuance is projected to then grow by 6.4% annually over the next five years, reaching $257 billion in 2027. Total sukuk outstanding is projected to reach $742.3 billion by the end of the year and $1.1 trillion by 2027.

Although economic and geopolitical developments earlier in the year had a muted impact on sukuk markets, issuance nonetheless eventually slowed on the back of multiple policy rate hikes and persistently high oil prices. Even so, robust demand for sukuk and growing inflation-induced budgetary pressures on economies such as Malaysia, Indonesia and Pakistan have buoyed global issuance during H1, and continue to do so in the short term.

“Despite a strong start to the year, issuance momentum slowed as the Federal Reserve and other central banks kicked off a global monetary tightening cycle. The surge in oil prices also contributed to the slowdown in issuance, as it reduced government borrowing needs in core sukuk markets.” Adil added.

Issuance began to moderate in the second quarter due to smaller issuances by the Saudi government, whose funding requirements reduced amid soaring oil revenues. The kingdom reported a $21 billion budget surplus in Q2, boosted by an 89 percent increase in oil income from the previous year. Despite this, the government has pledged that its spending will not be influenced by oil price movements and will continue to curb spending this year, signalling smaller issue sizes ahead.

In the GCC, most governments will be ending this year with budget surpluses. Still, most of the region’s economic development visions are coming to term by 2030 with many strategic projects either underway or being revived. Sukuk supporting these projects will likely be offered when more conducive issuance conditions transpire. As a result, GCC sukuk issuance will likely remain flat at best.

International markets lose appeal to sukuk issuers as tightening policy accelerates

International sukuk issuance slowed in H1 2022 although there had been strong activity from issuers during Q1, benefiting from strong  demand from foreign investors. International sukuk raised $22 billion in H1 2022, down 10% from $33.2 billion in H1 2021.

Interest rates have rapidly increased with three hikes taking the Fed benchmark rate to a target range of 1.5% to 1.7% during the first half of 2022. As this tightening policy strengthened the dollar, most sovereign sukuk issuers relied on borrowing from domestic markets in the first half of 2022.

The governments of Turkey, Pakistan, Indonesia and the Emirate of Sharjah were the only sovereigns to issue international sukuk, collectively raising just $8 billion. Meanwhile, a single $1 billion issuance sufficed for the Islamic Development Bank, normally big issuer in international sukuk markets.

Fed economists expect further benchmark rate increases will reach a range of 3.25% to 3.5% by the end of the year, which will likely deter some issuers from international markets. Still, despite increasing costs for dollar debt, there is an opportunity for issuers below investment grade to negotiate more favourable rates as higher sukuk yields attract bargain-hunting investors.

(Reporting by Jinan AlTaitoon;  editing by Seban Scaria) 

For more insights, analysis and projections for the sukuk market in 2022, download Refinitiv’s Sukuk Perception and Forecast Study 2022: Navigating a New Environment.