Fitch Ratings-Dubai/London: International sukuk issuance from major Islamic finance markets was almost unchanged in the first nine months of 2019 compared with the same period last year, Fitch Ratings says.
Full-year volumes could still be highly influenced by the funding needs and strategies of large individual borrowers which may come to the market before year-end, as well as by geopolitical developments that could have a positive or negative effect on investor appetite.
Sukuk issuance with a maturity of more than 18 months from the Gulf Cooperation Council (GCC) region, Malaysia, Indonesia, Turkey and Pakistan totalled USD30.6 billion in 9M19 compared with USD31.0 billion in 9M18. This supports our view that volumes normalised rather than declined last year after hitting record levels in 2017. Sukuk issuance in 9M19 was close to the USD29.3 billion average for the same period in 2012-2016.
Link to Infogram: Sukuk and Bond Issuance
GCC issuers have continued to access the sukuk market to diversify their funding mix and develop the Islamic debt markets in the region. Substantial international US dollar-denominated issuance in 2019 included deals from Turkey, Indonesia, Islamic Development Bank Trust Services Limited and First Abu Dhabi Bank, raising a total of USD6.5 billion. Moreover, these figures do not capture the recent growth in domestic local-currency issuance, such as Saudi Arabia's riyal-denominated local issuance programme.
GCC debt markets are still relatively developing, and individual sovereign funding decisions can profoundly affect total supply. For example, the Saudi Debt Management Office said earlier this year that it plans a new benchmark international Islamic bond issuance as part of its plans to diversify the financing of its national budget deficit, which could boost the 2019 total if executed before year-end.
Beyond the GCC, Malaysia has remained the key source of sukuk supply in 2019. Increased volumes have been driven by Bank Negara Malaysia providing more short-term Islamic Treasury Bills to aid liquidity management at Islamic financial institutions, and also by a surge in local-currency corporate issuance.
Notable corporate deals included energy service firm Serba Dinamik's USD300 million sukuk, rated 'BB-' by Fitch - the first dollar high-yield sukuk offering in the Asia Pacific region. The Malaysian market shows how, as the sharia-compliant investor base grows, the cost of sukuk issuance can become more competitive relative to conventional bonds, although this is not yet the case elsewhere.
We think new issuance volumes in the coming years will also be supported by refinancing activity. Nearly two-thirds of the USD99.4 billion of outstanding Fitch-rated sukuk at end-1H19 mature in less than five years.
Macroeconomic and geo-political conditions will also affect sukuk issuance. Lower oil prices, which we forecast to average USD65/bbl this year and USD62.5/bbl next year, down from USD71.6/bbl in 2018, tend to increase borrowing by oil-exporting sovereigns. Meanwhile, the dovish shift in global monetary policy in 2019 has reduced borrowing costs (we do not forecast the Fed to raise US interest rates again until 2021).
However, long-standing structural obstacles to sukuk market growth remain. These include a lack of standardisation across sukuk documentation and product structure, financial reporting and sharia codification. Legal uncertainties relating to creditor treatment and enforceability in a default remain largely untested.
Media Relations: Leslie Tan, Singapore, Tel: +65 6796 7234, Email: leslie.tan@thefitchgroup.com
Louisa Williams, London, Tel: +44 20 3530 2452, Email: louisa.williams@thefitchgroup.com
The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.
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