JAKARTA (TheInsiderStories) – Moody’s Investors Service predicts that State SUKUK issuance to recover in 2019 and surpass record highs in 2020, following a decline of oil prices in 2018, said senior analyst and Vice President Moody’s Alexander Perjessy, on Tuesday (02/19).

“We expect global SUKUK issuance to increase to US$87 billion by 2019, and rise towards $100 billion by 2020, from $78 billion in 2018,” he said.

According to him, this recovery will be driven by a combination of various government commitments for further development of the SUKUK market, higher refinancing needs and expectation of peak of budget deficit for major sovereign Sharia bond’ issuers in 2019-2020.

Moody estimates that the three largest issuers, Malaysia, Saudi Arabia and Indonesia, will gradually increase their share of sukuk in financing the fiscal deficit, which further supports market growth prospects.

Malaysia has so far had the largest long-term government SUKUK stock until the end of 2018 ($84 billion), 95 percent of which is in local currency. While Indonesia (Baa2 stable) and Saudi Arabia (A1 stable) have the second and third largest stocks of sovereign SUKUK, with about $40 billion each. In the two countries, around two-thirds of the outstanding stock is domestic.

The fourth and fifth long-term SUKUK in this respect are the Islamic Development Bank (IsDB) ($16 billion), most denominated in US Dollars, and Qatar (stable Aa3, $13.5 billion, 85 percent of which are local currency).

During 2015-2018, the SUKUK problem fulfilled nearly 80 percent of the financing needs of Malaysia’ fiscal deficit, while covering about one third of Qatar and Indonesia’ fiscal deficit and about 14 percent of Saudi Arabia’s needs.

Saudi Arabia finances around 14 percent of the fiscal deficit in 2015-2018 using SUKUK instruments, but this downplayed the growth in the use of sukuk as a source of budget financing given that the government of Saudi Arabia had just started issuing Islamic bond in 2017. While, IsDB (Aaa stable) is still the largest issuer among supranational with SUKUK more than $16 billion at the end of 2018.

“In 2018, we estimate that Saudi sovereign net sukuk issuance covers more than 40 percent of the government’s budget deficit. We hope this section will continue to increase in the next few years, reflecting the government’s commitment to the development of the sukuk market,” Perjessy said.

Moody’s noted, the commitment to the development of the SUKUK market is also reflected in the increasing share of sukuk in total government debt. At the end of 2018, SUKUK instruments accounted for around 46 percent of outstanding Malaysian shares and 44 percent of Sharjah’s debt stock, and almost 27 percent from Saudi Arabia.

He continued, in the medium term, gross issuance will rise further, especially when Gulf Cooperation Council’ SUKUK instruments issued after 2016 begin to mature in 2022 and are refinanced by issuing new SUKUK instruments.

“Global gross SUKUK issuance declined by 5 percent to $78 billion in 2018, from $82 billion in 2017, but we expect to increase again in 2019 due to increasing deficit financing needs amid moderate oil prices, more SUKUK refinancing needs high, especially in Malaysia (A3 stable), and as a large issuer gradually increasing the portion of sukuk in total net issuance,” said Perjessi.

In 2020, Moody’s expects total gross SUKUK issuance, including short-term securities, to surpass all-time highs of $ 93 billion in 2012. In the medium term, sovereign gross issuance will rise further along with SUKUK issued by the Gulf countries is starting to mature.

Moody’s assessed, the deepening of the global SUKUK market would enable the authorities to diversify their sources of financing while also providing a more stable source of conventional bonds given the strong structural demand for sharia-compliant securities from Islamic financial institutions.

“We see a change that has developed towards Islamic financial instruments being a positive credit for the government because of the more stable nature of these financing sources compared to conventional bonds because of more stable structural demand from Islamic financial institutions, which tend to hold sukuk instruments to maturity, and the diversification they give to the country’s debt profile,” he added.

Meanwhile, conventional government bonds and SUKUK are similar in terms of issuance size, coupon rate, and both are direct government obligations, although sukuk are often issued on shorter terms.

Moreover, most international SUKUK are issued for a period of 5-10 years even by issuers who regularly issue conventional debt at maturities of 10-30 years.

Written by Daniel Deha, Email: daniel@theinsiderstories.com