DIFC - Dubai, October 10, 2016 — Indonesia (Baa3 stable) and Malaysia (A3 stable) and continue to regularly issue long-term sovereign sukuk while Gulf countries have favoured conventional debt structure to finance their deficit, says Moody’s Investor Services. On balance, Moody’s Investors Service considers that issuance levels will be in line with historical levels and may approach $28 billion in 2016.
“The robust pipeline of issuances planned for the rest of 2016 points to a stable flow of sovereign sukuk this year,” says Mathias Angonin, an Analyst at Moody’s.
“While the governments of Cote d’Ivoire, Senegal and Sharjah returned to the sovereign sukuk market in 2016, issuance volumes are primarily supported by more regular issuers, such as Indonesia, Malaysia and Turkey, whose annual borrowing requirements have featured Shariah-compliant instruments for several years,” says Gabriel Torres, a Vice President and Senior Credit Officer at Moody’s.
Since 2011, Indonesia has issued $9.5 billion in sovereign sukuk in the international market, making it the most regular issuer of US dollar-denominated sukuk globally (see Appendix for rated sukuk issuances). Indonesia’s annual hard-currency issuances have contributed to its inclusion in a number of international benchmark bond indices. In addition, growing domestic acceptance of Shariah-compliant assets has led to large increases in local-currency sukuk issuances.
In local-currency terms, the amount of domestic sukuk issued through the first eight months of 2016 reached IDR124.0 trillion ($9.6 billion), more than a third higher compared with sukuk issuances in all of 2015 and more than double the amount recorded in 2014. Over the same period, sukuk comprised 29.5% of the Indonesia’s total issuance of debt securities, up from 23.1% in 2015 and 17.6% in 2014.
As oil prices dropped and deficits soared, Moody’s says Gulf Cooperation Council (GCC) countries have favored conventional structures over sukuk. Even so, sovereign sukuk issuance continues: so far in 2016, the government of Oman (Baa1 stable) issued its first sukuk, while Sharjah (A3 stable) issued its second.
Overall, the GCC sovereign sukuk market remains dominated by Qatar (Aa2 negative), the most active and regular issuer of long-term sovereign sukuk in the GCC. The rating agency says the choice between conventional and Islamic issuance depends on the investor base.
Malaysia has already developed a deep and mature Islamic finance market, while Indonesia has been the most regular issuer of sovereign sukuk in international markets. In the GCC, deposit growth (and therefore liquidity levels) has been higher among Islamic banks than conventional banks, but GCC financial institutions are constrained by the scarcity of highly rated Shariah-compliant assets, including sovereign sukuk.
Senegal (B1 positive), Côte d’Ivoire (Ba3 stable) are among a handful of new sovereign sukuk issuers, while Nigeria (B1 stable) is stepping up volumes. SSA sovereign sukuk issuance is likely to remain active as governments set up regulatory frameworks for a retail Islamic banking sector and test market appetite.
While global sukuk issuance volumes have more than halved from a peak of $149 billion in 2012 to just under $70 billion in 2015, international sovereign sukuk issuance has remained mostly stable throughout this period at an average of $25 billion per year. Indeed, sovereign sukuk represented 50% of total sukuk issuance in the first half of 2016, and is set to reach around $28 billion by year-end.
Sovereign sukuk issuance to remain broadly stable in 2016, against a backdrop of markedly lower total sukuk issuance. In contrast to the contraction in corporate sukuk issuance, sovereign sukuk issuance has remained relatively stable at $22 billion as of September 2016, compared with $21 billion for the first nine months of 2015. A robust pipeline of issuances planned for the rest of 2016 points to broadly stable sovereign sukuk issuance of around $28 billion for the year as a whole.
South-East Asia continues to lead sovereign sukuk volumes with regular long- term issuance, followed by the Gulf Cooperation Council (GCC), where volumes are lower. Malaysia (A3 stable) and Indonesia (Baa3 stable) continue to dominate global sukuk issuance volumes overall, with regular long-term sovereign sukuk issuance plans.
But the region’s short-term sovereign sukuk issuance volumes dropped in 2015 after Malaysia’s central bank decided to stop issuing short-term sukuk because the large share of non-resident investors created volatility in that asset class. GCC countries have also continued issuing sovereign sukuk, but at lower levels than previously. Qatar (Aa2 negative) remains the GCC’s most active and regular issuer of long-term sovereign sukuk.
Limited growth in global sovereign sukuk issuance is the result of governments choosing conventional funding structures over sukuk for different reasons. In the GCC, governments have generally opted for conventional structures over sukuk to finance widening deficits. Overall, the nature of the investor base has informed governments’ choice of funding structures. Malaysia already has developed a deep and mature domestic Islamic finance market, while Indonesia has been the most active issuer of sovereign sukuk in international markets in recent years.
Sukuk market has fewer new entrants, but sub-Saharan African sovereigns continue to ramp up issuance. While fewer advanced industrialized countries are accessing the sukuk market, Senegal (B1 positive), Côte d’Ivoire (Ba3 stable) are among a handful of new sovereign sukuk issuers, and Nigeria (B1 stable) is stepping up volumes.
Total global sukuk issuance since 2001 amounts to around $900 billion, of which around $360 billion is outstanding. However, global sukuk issuance has dropped 42% in 2015 alone to just below $70 billion from high levels in 2012-14. The volatility of global sukuk issuance is partly due to its high concentration, with 84% of outstanding sukuk issued in just three jurisdictions: Malaysia, the United Arab Emirates (UAE, Aa2 negative) and Saudi Arabia (A1 stable).
Sukuk issuance by sovereigns and, to a lesser extent, financial institutions has remained largely stable over the past five years, in contrast with corporate sukuk issuance levels. We estimate that global sovereign sukuk issuance (excluding short-term paper) averaged $25 billion per year between 2011-15, with $23 billion issued in 2015.
In light of muted corporate issuance, the public sector’s share of total YTD sukuk issuance has increased. We estimate that 38% of total long-term sukuk were issued by sovereigns in 2015, compared to 35% in 2014. During the first half of 2016, the share of sovereign sukuk issuance out of total sukuk issuance went up to 50% as corporate issuance dried up (see Exhibit 2). Taking into account government-related entities, the combined total made up almost 66% of total issuance so far in 2016, compared to an average of around 54% over 2012-15.
The fall in international sukuk issuance in 2015 was broad-based across geographies. Issuance in the UAE, the largest market for international sukuk fell to $4.3 billion from $6.7 billion, issuance in Saudi Arabia fell close to zero from $2.9 billion while supranational issuance was halved. On the other hand, issuance in Malaysia and Indonesia grew by a cumulative $3.5 billion.
Specific factors as well as a normalization after issuance peaks in 2012-14 contributed to the 2015 contraction in sukuk issuance. First, the 2015 drop was mostly accounted for by a decline in short-term and corporate sukuk related to the decision of Malaysia’s central bank, Bank Negara Malaysia (BNM), to discontinue issuance of short-term investment sukuk. As a result, 2015 short-term sukuk issuance was $36 billion lower than in 2014, out of an overall $49 billion decline in sukuk volumes.
Second, in 2015, General Electric Company (A1 stable), Abu Dhabi’s Tourism Development and Investment Co PJSC (TDIC, unrated) and the government of Dubai (unrated) decided not to refinance their maturing sukuk. A third factor is that sukuk issuance had been boosted in 2012-14 by the low interest rate environment, and the expectation at the time that the US Federal Reserve would imminently start raising interest rates.
While we expect 2016 global sukuk issuance volumes to approach $70 billion – the same level recorded in 2015 – we expect sovereign sukuk issuance to exceed the 2011-15 average issuance volumes of $25 billion to reach $28 billion in 2016. Our expectation is based on the robust pipeline of sovereign sukuk issuance planned for the remaining three months of 2016.
Key drivers of robust sovereign sukuk issuance include: – growing retail demand for Islamic financial services (since 2010, Shariah-compliant banking assets have grown at a weighted-average CAGR of 24% in Turkey (Ba1 stable), Indonesia and Malaysia, compared to 14% for conventional banking assets), – greater standardization of unsecured sukuk structures, – global investors’ increasing familiarity with sukuk instruments, and – increased policy support from governments, for instance by setting up a dedicated legal framework.
In the medium term, international issuances are likely to rise as sovereign and government-related issuers from the GCC countries tap international markets because of their US dollar currency pegs. Despite recent growth in cross-border sukuk issuance, most sovereign sukuk are issued in local currencies for domestic investors. Saudi Arabia is the exception and is likely to continue issuing local-currency sukuk because of its strong domestic investor base.
Moody’s report, entitled “Sukuk-Issuing Sovereigns — Global - Sovereign Sukuk Issuance Remains Stable Amid Lower Corporate Sukuk Issuance” is available on www.moodys.com. Moody’s subscribers can access this report via the link provided at the end of this press release. The rating agency’s report does not constitute a rating action.