Saudi Arabian issuers boost sukuk in first five months of 2019

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S&P expect total Sukuk issuance will average $105bln-$115bln this year

JEDDAH — The sukuk market enjoyed a strong start to the year but it may not last, S&P Global Ratings said Sunday in the "The Sukuk Market Starts 2019 Well, But Activity Might Taper Off," report published on RatingsDirect.

"High levels of liquidity in Indonesia, Turkey's efforts to tap all available financing sources, and the return of Qatari and Saudi Arabian issuers to the market have boosted issuance of sukuk 17.6% in the first five months of 2019," said S&P Global Ratings Head of Islamic Finance, Mohamed Damak.

We now anticipate total sukuk issuance of $115 billion this year, including $32 billion of foreign currency issuances, which is the upper limit of our previous forecast."

"However, this represents little-to-no growth on the $114.8 billion seen in 2018, with selective investors, worsening geopolitical stability in the Middle East, and challenges inherent to sukuk likely to hold back the market," added Damak.

S&P expect total Sukuk issuance will average $105 billion-$115 billion this year, assuming the Brent oil price stabilizes at $55 per barrel.

This follows a mild performance in 2018 when issuance dropped to $114.8 billion, a 5 percent decline compared with 2017; US dollar Sukuk alone fell by 15 percent year on year.

"If the oil price falls, and stays below $55 for a sustained period, we would expect to see higher Sukuk issuance by Gulf Cooperation Council (GCC) sovereigns. In our view, accelerating standardization and creating local currency Sukuk markets in the GCC could help the industry enhance its value proposition and stimulate growth," said Damak in an earlier report "Oil Prices Will Help Shape Sukuk Markets' Performance in 2019."

Tightening liquidity conditions worldwide, high geopolitical risks in the Middle East, and challenges inherent to sukuk issuance will likely dampen sukuk market performance in 2019. S&P Global Ratings anticipates total issuance of $105 billion-$115 billion ($28 billion-$32 billion for foreign currency issuances and $85 billion-$95 billion excluding reopening of instruments) this year.

"Nevertheless, we expect higher demand for funding in most GCC countries, given our reduced oil price assumptions compared with last year's outturn of $71 for Brent. We also expect Malaysia will continue to support market growth," said Damak.

"Last year, new sukuk issuance totaled around $91.4 billion ($114.8 billion including reopening, which consists of issuances under local currency unlimited programs) compared with $95.7 billion in 2017 ($120.6 billion with reopening). The decrease was even more visible, at 15.1 percent, for foreign currency sukuk issuance, primarily in US dollars. The marked drop in issuance in Saudi Arabia and Qatar were partly offset by issuances from the Central Bank of Kuwait and a hike in private-sector issuances in the United Arab Emirates (UAE). Activity in Malaysia and to a lesser extent Indonesia continued to support the market, contributing collectively to around 52 percent of new issuance in 2018. Issuers in Turkey also stepped up their issuances to diversify their investor bases amid substantial reliance on external debt and reduced access to global capital markets in the second half of the year," Damak added.

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