Sukuk maintains positive outlook; undeterred by continued slowdown

Thomson Reuters has released the findings of its fifth consecutive Sukuk Perceptions and  Forecast study. Despite a bleak 2015, market players remained hopeful for robust year ahead  with expectations of oil-exporting countries in core markets to turn to Sukuk as a primary debt  management tool. Core markets have adapted to ongoing low oil prices, while apprehension  over expected global interest hikes has begun to subside.

However, the decision from Bank Negara Malaysia (BNM) to cut short-term Sukuk issuances continues to dampen Sukuk supply. Moreover, the shift in sovereign issuers’ preference from Sukuk to conventional bonds has contributed further to the decline in supply. Total Sukuk issued in the first 9 months of 2016 dropped further by 18.46 per cent to $39.8 billion from $48.8 billion for the same period in 2015.

Nadim Najjar, Managing Director, Middle East & North Africa, Thomson Reuters, said, “The global Sukuk market continued to drop in terms of volume and value during 2016, albeit at a much slower pace than in 2015. Last year, expectations were set on governments of oil-exporting countries, mainly in the GCC, increasing their Sukuk issuances to cover their widening budget deficits that resulted from persistently low oil prices. These expectations were curbed. Although these governments, mainly GCC, increased their overall debt issuance, these were mostly geared towards conventional bonds.

“This year, the Sukuk pipeline is valued at $22 billion, compared to a stronger pipeline of $32 billion last year. However, there are signs indicating the expansion of the Sukuk market, especially in Africa. In 2016, we have seen the return of Ivory Coast with their second issuance, after launching their debut Sukuk in 2015. The Togolese government issued their debut Sukuk earlier this year. Other African countries, including Nigeria and Kenya, have issued new Sukuk regulations as a precursor to launching their first sovereign Sukuk.”

The report found that both potential demand and supply of Sukuk are expected to grow, with demand substantially exceeding supply until 2021. The gap between supply and demand is forecasted to be $143.1 billion in 2017, increasing to $178.4 billion in 2018 and reaching $271.3 billion in 2021. The supply of Sukuk is projected to recover in 2017 with 10 per cent growth, based on expectations that demand for bonds issued by governments of oil-exporting countries begins to subside once foreign investors find similar returns in their home countries with the reversal of negative yields. These GCC governments are expected to return to issuing Sukuk to fund their deficits and capitalize on increasing demand from Islamic investors. This growth in supply is expected to remain steady over the following four years (2018 to 2021).

In addition, the report also highlights shifts in Sukuk market attributes. International Sukuk gained 10 per cent market share of new issuances from issuances denominated in domestic currencies. This has resulted in the US Dollar overtaking the Malaysian Ringgit as the most issued currency, accounting for 45 per cent of issuances. The Sukuk market has also seen Quasi-sovereign issuances become more prevalent this year, with its share increasing by seven per cent as the shares of both sovereign and corporate issuances declined.

Copyright Reserved 2016 CPI Financial

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