Dubai: The global sukuk market is expected to face some slowdown in 2015 after reaching the second-highest year for sukuk issuance in 201, according to projections by credit rating agency Standard & Poor’s.
Sukuk issuance reached $116.4 billion in 2014 compared with $111.3 billion in2013, and despite the economic headwinds, the rating agency said it expects the total issuance to cross the $100 billion mark again in 2015.
“Supporting sukuk issuance is the still-positive economic performance of core markets such as nations in the Gulf Cooperation Council (GCC) and Malaysia, the implementation of new regulatory requirements such as the Basel III liquidity coverage ratio, and increasing interest in sukuk from countries that have not yet tapped the sukuk market looking to diversify their investor base,” said Mohamed Damak, global head for Islamic finance of S&P.
Despite the positive environment, Damak expects some emerging headwinds could slow its progress compared to 2014. “We foresee some turbulence ahead that could cause overall issuance volumes to be lower in 2015,” he said.
A serious potential threat could emerge from the US Federal Reserve’s plan to increase its benchmark interest rate in the second quarter of 2015. The rate hike is likely to reduce liquidity in global capital markets, including emerging markets.
A preview of such risk took place in 2013 and to a lesser extent in 2014 when the Fed announced the tapering of its quantitative easing. However, S&P said emerging market instruments will benefit, as a side effect, from the monetary stimulus that the European Central Bank is likely to implement in 2015.
The economic impact of rapid decline in oil prices is also expected to reduce demand for funding in core markets for sukuk such as the GCC. Analysts say a decline economic growth resulting form low oil prices could reduce financing needs in these markets, especially if the oil prices continue to decline. S&P forecasts economic growth in the GCC to average around 3.7 per cent in 2015 compared with 4.2 per cent in 2014.
But the slowdown in demand for sukuk in GCC could be offset by strong economic growth in Malaysia which is expected to grow at 5.5 per cent and new sovereign issuances.
“We expect new sovereign issuers to tap the sukuk market in 2015, continuing a trend that started few years ago. In 2014 alone, the UK, Luxembourg, South Africa, Hong Kong, Senegal, and others went to the market with their first sukuk issuances. The rationale for sovereign sukuk issuance can vary for different governments, but we think creating benchmarks and diversifying the investor base have been among the most important reasons for new sovereign sukuk issuance in 2014,” said Damak.
The implementation of new regulatory requirements, particularly Basel III, and the lack of high-quality liquid assets in the Islamic finance industry might increase sovereign and central banks’ issuances and provide the Islamic finance industry with much-needed instruments to manage liquidity.
Central banks are looking at the experience of Bank Negara, the central bank of Malaysia, which is the established leader in sukuk issuance. Total sukuk issuance from central banks reached $50.2 billion in 2014, or 43.1 per cent of all issuance, with Malaysia alone accounting for 92.1 per cent of that at year-end 2014, followed by the Central Bank of Bahrain at 3.7 per cent.
