Uptick in sukuk issuances as global recovery gains traction
The global long-term sovereign sukuk issuance is set to drop to $73 billion in 2022
Global sukuk issuances, which surged 39 per cent to $250 billion in 2021, will continue to grow this year as economies recover from the coronavirus pandemic.
“Market activity continues to grow, global sukuk issuance was near $40 billion in January/February 2022, more than 7.0 per cent higher than the same period in 2021,” the Institute of International Finance (IIF) said. The majority of issuances came from Pakistan, Indonesia, Malaysia, the GCC countries and Turkey.
“Downside risk stems from higher oil prices reducing a number of sovereigns’ funding needs, AAOIFI (Accounting and Auditing Organisation for Islamic Financial Institutions) compliance complexities, traditional risks such as interest-rate rise, lower global investor appetite for emerging-market debt and political risk,” said Fitch.
However, according to Moody’s Investors Service, the global long-term sovereign sukuk issuance is set to drop to $73 billion in 2022 and $75 billion in 2023, from $88 billion in 2021, including issuance by multilateral development banks.
“We expect issuance to fall as government deficits continue to narrow because of higher oil prices, lower coronavirus-related expenditure and accelerating economic activity in core sukuk-issuing countries,” said Alexander Perjessy, vice president, senior analyst at Moody’s.
Issuance volumes already dropped 22 per cent in 2021, with the largest decline from the GCC sovereigns, mainly Saudi Arabia.
Moody’s estimates that the aggregate fiscal deficit of major sukuk-issuing sovereigns — Saudi Arabia, Malaysia, Indonesia and Turkey —will decline to $92 billion in 2022 from $118 billion in 2021 and $194 billion in 2020. The aggregate fiscal positions of the GCC sovereigns, excluding Kuwait, will improve to a surplus of $50 billion in 2022 from a surplus of $13 billion in 2021 and a deficit of $112 billion in 2020. These projections are based on the 2022 average oil price assumption of $75 per barrel.
New entrants into the sovereign sukuk market present a small upside risk to our issuance projections. The potential passage of Kuwait’s new public debt law and Egypt’s recent approval of the Sovereign Sukuk Law will support these countries’ sovereign sukuk issuances in the medium term.
According to the IIF report, only two per cent ($5billion) of the total issuances was linked to environmental, social and governance (ESG) factors, compared to 6.5 per cent in global bond markets.
Expansion of ESG-linked sukuk was fastest in Indonesia, Malaysia, Saudi Arabia and the UAE, with corporations issuing $6 billion worth of ESG sukuk since 2016. About 80 per cent of the total cumulative issuance has been in US dollars, 15 per cent in Malaysian Ringgit and the rest in euros.
Indonesia has the largest green sukuk market (proceeds are applied for climate and environmental projects), according to the IIF. Since 2017, Indonesia, Malaysia, Saudi Arabia, the UAE and the Jeddah-based Islamic Development Bank have issued $9 billion worth of green sukuk.
Sustainability-linked sukuk issuances also rose last year as the importance for green and social impact projects grows amid efforts by countries to transition to a greener economy. Total sustainability sukuk issuance jumped to $3.7 billion in 2021 from $1.6 billion in the previous year.
“The slow pickup of ESG-linked issuance in global sukuk markets largely reflects the limited project pipeline and challenges in identifying projects and assets that meet relevant ESG criteria,” the report said.
“A lack of knowledge at the issuer and investor level about the process and benefits is another important impediment to market expansion. High issuance costs are also curbing the potential issuer appetite,” said the report.