|18 February, 2020

More hope for sukuk market growth: S&P

Global Sukuk issuances witnessed a 25.6% hike last year from 2018 numbers, with foreign currency issuances leaping 20.8%

Image used for illustrative purpose.

Image used for illustrative purpose.

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Global Sukuk issuances witnessed a 25.6 per cent hike last year from 2018 numbers, with foreign currency issuances leaping 20.8 per cent. This was driven by high levels of liquidity in Indonesia, good performance in Malaysia, Turkey's efforts to tap all available financing sources and the return of some GCC issuers to the market.

Total Sukuk issuance for 2020 is expected to reach $160 billion-170 billion this year, including $40 billion-$45 billion of foreign currency issuance, according to S&P. This represents an approximately 5 per cent growth on the $162 billion seen in 2019. The research and ratings agency added that ample global liquidity and negative yields on more than $10 trillion of debt mean that issuers with a good credit story will find relatively easy entry to the Sukuk market this year.

2019: A GOOD YEAR

Notable players last year were the usual suspects—Malaysia and Indonesia. Nevertheless, the GCC also pulled it weight with higher issuances of local currency denominated government Sukuk from Saudi Arabia and a few private sector issuers. In Kuwait, the central bank continued to offer Sukuk as liquidity management instrument for Kuwaiti banks. Bahrain’s issuance volumes increased only slightly as the government had less need to tap capital markets having dusbrsed funds from the $10 billion GCC support package. On the other hand, the UAE witnessed a marginal drop as corporates front-load their issuance programmes in 2018 to prepare for less supportive market conditions.

In the wider Middle East, Turkey increased its volumes, with total Sukuk issuance of $13.8 billion in 2019, compared to $8.4 billion in 2018. Turkish had to tap all available pockets of liquidity including the Sukuk market as it has been under significant pressure in recent months due to their heavy reliance on external debt and declining rollover ratios.

BETTER PROSPECTS

Additional easing by the US Federal Reserve is unlikely and only a marginal deposit rate cut by the European Central Bank is expected this year. S&P suggests that global liquidity remains abundant. While some issuers with a good credit story will find it easy to tap the Sukuk market, others will continue to prefer conventional instruments because they are easier to issue—and this is usually the case with new issuers.

Apart from that, continuous support from the industry itself as a whole, such as incentives from governments, consultative efforts from regulators and standard setting bodies as well as innovative propositions from banks and fintechs will all assist in bringing the industry mainstream.

S&P pointed out several global themes that bode well for Islamic finance— technological innovation, sustainable investments and diversification—will continue to open the market to new players particularly small and midsize issuers.

BANKING ON INNOVATION

On the tech front, 2019 witnessed the launch of a blockchain-enabled platform for Sukuk issuance and management. Yet to gain traction in the market, the platform simplifies the Sukuk issuance process having the potential to effectively boost issuance. As it relies on a set of standarised legal documentation for the Sukuk structure, an issuer can simply insert its underlying assets and build its investor book on the platform. With the whole transaction managed on blockchain, it improves transparency and traceability, making standardisation more achievable in Islamic finance transactions.

SUSTAINABLE INVESTMENTS

Socially responsible investment is a trend that became increasingly popular over the last 12 months. Green bonds and Sukuk issuances are expected to increase this year as more investors buy into the concept and benefits become more apparent. Additionally, as GCC countries transition towards less carbon-intensive economies, green projects are expected to increase, with some funds like raised through the Sukuk market.

OIL AND POLITICS

These two factors continue to be the main risks impacting large Islamic finance markets. S&P suggests that the most obvious impact would be made by lower oil prices. A lower price would mean higher financing needs for GCC governments, which would then need to choose between conventional or Sukuk instruments. And historically, the conventional bond route seems to be the preferred option. Similarly, a higher oil price would likely mean lower financing needs and lower issuance volumes for GCC governments.

Since the start of the new year escalated tensions between US and Iran was a legitimate concern by many parties. However, the situation seemed to have stabilised and analysts believe that a full- fledge direct military confrontation is something that is highly unlikely. S&P said that any escalation will remain contained as a direct conflict would be economically, socially, and politically destabilising for the entire region, including US-Gulf allies. It added that a potential intensification of proxy conflicts will also further undermine confidence and investment in the region— which is something that is undesirable for main economies in the region.

If a protracted and wider conflict emerges, assuming export routes remain functional, the fiscal benefit of potentially higher oil prices for Gulf sovereigns will likely be offset by the adverse effect on capital outflows and weaker economic growth, the ratings agency said. In case of a significant increase in tensions, investors could shift their attention to more stable regions. Such a situation would prompt an increase in funding costs, a lower appetite for regional instruments, or major foreign funding outflows.

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