A stronger appetite for sukuk issuance in some GCC countries is among the key factors that promise to spark an uptick in the market performance of Islamic bonds in 2020.
S&P Global Ratings estimates a total sukuk issuance of between $160 billion and $170 billion this year, representing five per cent growth on the $162 billion seen in 2019. The total estimated issuances include $40 billion-$45 billion of foreign currency sukuks.
Mohamed Damak, primary credit analyst at S&P, expects recent strong sukuk market performance to continue in 2020 also helped by robust global liquidity, a new fintech proposition, and initiatives by governments and standard setters. The expected upswing in sukuk issuances will be underpinned by high levels of liquidity in Indonesia, Turkey's efforts to tap all available financing sources, the and good performance in Malaysia boosted sukuk issuance by 25.6 per cent in 2019 compared with 2018.
An anticipated lower oil price would mean higher financing needs for GCC governments, which would then need to choose between conventional or sukuk instruments.
According to a leading Japanese bank MUFG, the financing needs of four GCC countries to meet the anticipated fiscal deficits and investment programmes in 2020 stand at $73.5 billion, or 4.4 per cent of the region's GDP.
S&P Global Ratings said in its report that in 2019, foreign currency issuance also increased by almost 20.8 per cent, explained primarily by activity in Turkey but also issuances by Malaysian and Saudi corporates and Qatari banks. Overall in 2019, the market exceeded S&P Global Ratings' previous expectation of, at best, a stabilization in issuance. Significant positive market conditions and the unexpected performance of some issuers/countries resulted in stronger growth.
"Abundant 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 in 2020. Therefore, barring an abrupt turn of the economic cycle or a significant deterioration in the geopolitical environment, we think issuers from core Islamic finance markets (the GCC, Malaysia, Indonesia, and Turkey) will maintain good access to the sukuk market. We believe new fintech propositions in the Gulf are likely to open the market to small and midsize issuers," S&P analysts said. The report noted that given the increasing commitment to the Principles of Responsible Investments, the green sukuk market will continue to expand, aided by opportunities related to energy mix diversification in the GCC/Malaysia and investor diversification.
Several core Islamic finance countries have committed to diversifying their energy mix with a significant contribution from green energy generation.
Moreover, as GCC countries begin their transition toward less carbon-intensive economies, green projects are set to flourish. Some of these projects will likely be funded via the sukuk market.
In 2019, total sukuk issuance increased to $162 billion, compared with $129 billion in 2018. Sukuk issuances from Malaysia, Saudi Arabia, Indonesia, Turkey, and Qatar supported the activity of the market. "Of particular note was the strong performance of Malaysia, explained primarily by government issuances. The International Islamic Liquidity Management Corporation, and to a lesser extent other private sector and government-related entity issuers, have also stepped up their sukuk issuance volumes in 2019.
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