JAKARTA (TheInsiderStories) – Global Sukuk issuance is expected to reach US$100 billion in 2018, in line with 2017 levels, says Moody’s Investors Service on Tuesday (04/09).
The rating agency’s expectation of broadly stable issuance for the year – despite a 12 percent decrease to $55 billion in the first half of 2018 – is supported by regular issuance from government and corporate entities in Malaysia (A3 stable) and Indonesia (Baa2 stable) in the second half of 2018.
It said, the decrease in Sukuk issuances during the first half of 2018 was driven by lower volumes from the Gulf Co-operation Council (GCC) region.
“Over the long term, we expect Sukuk issuance volumes to continue to grow as governments across the core Islamic finance markets shift their financing mix towards a combination of conventional and Islamic instruments,” says Nitish Bhojnagarwala, a Vice President and Senior Credit Officer at Moody’s in a written statement.
Moody’s also notes that the launch in July 2018 of a primary dealers programme for government Sukuk in Saudi Arabia (A1 stable), and the start of Sukuk trading on the Turkish stock exchange in August 2018, are supportive for the market.
Green Sukuk issuance is set to accelerate in Malaysia and Indonesia as governments in both countries seek to promote sustainable policy agendas by attracting private capital into low-carbon and climate-resilient infrastructure projects.
The world’s first green Sukuk was issued in 2017 in Malaysia, and the government of Indonesia unveiled the first sovereign green sukuk in February 2018, raising $1.25 billion. The Malaysian and Indonesian precedents could encourage other issuers to enter the green sukuk market, in particular GCC governments, which aim to diversify their economies away from the oil industry.
Previously, Moody’s Investors Service reported the global Sukuk market in 2018 will continue to rebound from a sharp drop in volumes in 2015, supported by a range of factors, including rising sovereign issuance, product innovation, increasing demand from retail banks and a narrowing of spreads over conventional bonds.
Moody’s estimates that total Sukuk issuance will reach around $95 billion by the end of this year, after more than $85 billion in 2016, including more than $50 billion of Sukuk issuance by sovereigns.
Christian de Guzman, a Moody’s Vice President — Senior Credit Officer said the sovereign Sukuk issuance volumes will continue to grow in 2018 as governments look to diversify their financing mix and satisfy the liquidity needs of Islamic retail banks.”
A number of factors will support sovereign sukuk issuance, including high
borrowing needs for GCC sovereigns, which Moody’s expects to reach around
$148 billion in 2018.
GCC countries drove the market’s growth in 2017 with Saudi Arabia (A1 stable) raising the lion’s share of sukuk during the year to a total of $17 billion, or 40 percent of global long-term sovereign sukuk issued in the first eight months of the year.
Other countries with large fiscal deficits, such as Oman (Baa2 negative) and Bahrain (B1 negative) — estimated at 11.9 per cent and 13.4 per cent of GDP in 2017 respectively — will also contribute to the market’s expansion.
Other factors contributing to higher sovereign sukuk issuance include demand from domestic banks, and product innovation that will help address two fundamental challenges faced by the issuers: the lack of physical assets for structuring Sukuk and the prohibition from transferring asset ownership to special purpose vehicles under some jurisdictions. Narrowing of spreads over conventional bonds will also contribute to sukuk issuance.
Despite Malaysia’s (A3 stable) falling share of sovereign sukuk issuance, it remains the largest Sukuk market with an estimated 43 percent of total sovereign sukuk outstanding in 2016.
Indonesia’s (Baa3 positive) share in annual sukuk issuance has increased to 30 percent in 2016 (from just under 10 per cent in 2010) and will likely grow with the government’s efforts to develop the Islamic finance sector.
Although the number of new entrants into the Sukuk market has declined
since 2014, Nigeria (B2 stable) issued its first Sukuk this year and a number of sovereigns have indicated that they intend to take advantage of the asset-based nature of Sukuk financing to finance their size-able infrastructure needs, including Niger (unrated), Kenya (B1 Rating Under Review), Ghana (B3 stable), Morocco (Ba1 positive), Tunisia (B1 negative) and Algeria (unrated).
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