Tuesday 19 June 2018

Global sukuk ‘set for long-term growth’

Manama, November 27, 2013

While the annual global issuance of sukuk has grown at a compound annual growth rate of 38 per cent to $81 billion in 2012, up from $3.3 billion in 2002, the market is likely to maintain its positive long-term growth trends, a report said.

Of the $371 billion of sukuk issued since 2001, $274 billion remains outstanding, added the Islamic Finance report from Moody’s Investors Service.

The drivers of this continued growth include: (1) increasing demand for Islamic financial assets and services; (2) global investors’ increasing familiarity and comfort with sukuk instruments; (3) the increased support from governments of Muslim countries; and (4) the increasing standardisation of unsecured sukuk structures.

Moody’s expects sukuk issuance this year to marginally exceed the 2011-level of around $51 billion. This amount is much lower than the record of $81 billion issued in 2012, and mainly reflects the more challenging conditions in emerging markets in H2 2013.

The Saudi Riyal market in Saudi Arabia is also starting to show strong potential with increased issuance and $22 billion of domestic sukuk currently outstanding.

Given their currency pegs to the US dollar, the GCC countries have a much stronger presence in the foreign currency sukuk market. This trend is likely to continue given investor demand for Gulf credit coupled with the high growth levels, public spending plans and leverage appetite for many of the region’s borrowers, according to the report.

A diversifying mix of issuers will support market trends. With over 350 issuers issuing to date, we foresee sukuk becoming a growing part of issuers’ funding mixes for all types of borrowers as investors become comfortable with sukuk as an ‘alternative’ investment product.

Existing issuers as well as new entrants − non-Islamic sovereigns, traditional corporates and infrastructure projects based in Islamic countries − are ever more at ease with tapping the additional pool of Islamic money alongside more conventional funding. The international sukuk market is fairly diversified, with sovereigns, financial institutions and corporates each contributing approximately a third of the total.

Product innovation and improving liquidity indicate a slowly maturing market, said Moody’s.

Market depth is increasing with the emergence of new instruments, such as sukuk with longer-term structures, amortising and more equity-like features, helping to drive the rise in issuance volumes. In addition, the growing base of conventional investors is supporting secondary market liquidity.

Malaysia and the Arabian Gulf countries will continue to dominate new issuances, although Turkey and Indonesia have the potential to become key sukuk markets in the long term.

Issuance volumes will remain concentrated in regions that have a natural cultural affinity with the sector, such as in the GCC markets, where Islamic banking asset estimates range from 10 per cent in the UAE to 50 per cent in Saudi Arabia, although compared to Malaysia there is still a relative shortage of institutional, long-term investors such as pension or takaful funds that are necessary for the market to reach its full potential.

Sukuk volumes will continue to grow during 2014 with increasing international issuances, the report noted.

In line with the increased global investor comfort with sukuk and the regional growth trends in Asian and Gulf debt capital markets, sukuk volumes will continue to rise particularly for the GCC-based borrowers issuing in foreign currency given the extensive financing needs of the region, according to the report. – TradeArabia News Service

Tags: dollar peg | GCC | global sukuk | Issuance |

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