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Sukuk issuance worldwide could fall by just five percent this year despite the COVID-19 outbreak, reversing four consecutive years of rapid growth, Moody's said in a report.
According to global ratings agency, some $77 billion in sukuk was issued in the first six months of 2020, down from $87 billion in the same period of 2019 as the coronavirus pandemic pared activity in Malaysia and Indonesia.
Nitish Bhojnagarwala, VP-Senior Credit Officer at Moody's, said: "We expect the decline to be partly offset by the slow oil price recovery which will increase the financing needs of Gulf-Cooperation Council (GCC)1 countries. Accordingly, we expect issuance to rally in the second half of the year to around $90 billion, led by a surge in sovereign issuance, notably in the Gulf. Activity in Malaysia and Indonesia may also recover moderately given uncertainty regarding the length of the crisis."
Modest issuance decline would be first for five years, according to Moody's.
"We expect sukuk issuance volumes to be around $170 billion in 2020, down from $179 billion in 2019. This would follow a significant 36 percent increase in 2019 and marks a reversal from four consecutive years of growth," Bhojnagarwala said.
However, despite the decline, 2020 will be the second highest issuance level for the sukuk market ever.
First-half issuance declined significantly. Total issuance in the first six months of 2020 dropped to $77 billion, down 12 percent from the same period last year, as activity in Malaysia and Indonesia flagged. Issuance in southeast Asia dropped by 25 percent, while volumes in the Middle East rose 7 percent. Sovereigns and government-related entities remained the largest issuers by value.
Issuance in United Arab Emirates (UAE) rose significantly from a low base, supported by corporates and financial institutions. "We expect activity to pick up in the second half. We expect volumes to rebound to around $90 billion in the second half of 2020, as governments look to raise money to meet the financing requirements of their responses to the coronavirus pandemic," Bhojnagarwala said.
According to the ratings agency, persistently low oil prices could also lead to higher deficits and financing needs among oil-exporting issuers, primarily in Gulf countries.
New entrants and green sukuk could stimulate issuance.
"We expect some African sovereigns and corporates to enter the market, following the lead of Egypt and Nigeria earlier this year. While the green sukuk market is in its infancy, we expect issuance to accelerate as efforts to combat climate change gain traction, building on green sukuk transactions in Malaysia and Indonesia in recent years," Bhojnagarwala said.
(Writing by Seban Scaria; editing by Daniel Luiz)
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