A flurry of reports recently about the prospects for the sukuk market in 2014 all expect a pick-up in pace, for a number of reasons.
Standard & Poor’s envisages the industry expanding again, following a dip in volumes by some 13 per cent in 2013, as the market digested the promised tapering of easy US monetary policy.
The agency forecasts total primary issuance to exceed $100 billion for the third successive year “if yields remain attractive”, driven by corporate and infrastructure deals in the Gulf, and the resumption of Malaysia’s investment programme.
The UAE and Saudi Arabia are anticipated to lead the way in the GCC, “as regulators continue to minimise barriers in the market”. Besides impetus from project spending, economic growth based on $100 oil prices or thereabouts will encourage banks as both borrowers and investors, also adjusting their capital bases to meet Basel 3’s gradual implementation.
In Malaysia — whose sukuk offerings dropped by 25 per cent last year, though maintaining a dominant share of total — a broad investor base and liquid market give underpinning. A phase of government cutbacks should be eased by GDP growth exceeding 5 per cent in 2014, with demand for ringgit issues liable to be buoyant.
S&P made note too of investors seeking sukuk in non-traditional markets, and that “Africa may soon offer a fresh alternative”. Senegal and South Africa have been looking at issuing sukuk, while Tunisia, Egypt, and Morocco have been finalising their legal frameworks to do so.
Multilateral institutions may further stimulate sukuk activity, either themselves Islamic or representing countries with large Muslim populations. The IDB, ADB, and other forums, “are natural and prominent players”, aiming “to facilitate intermediation and integration”, so benefiting Islamic debt capital markets.
Yet, S&P suggests that “without standardisation and [the] architecture to support the industry, it is unlikely [to] reach a new dimension”, implying that official attention is necessary to complement potential market supply and demand.
Fitch Ratings, meanwhile, says Gulf nations’ efforts to become Islamic finance hubs “is also likely to spur sukuk issuance”. Last year’s decline was likely “to be a blip in the longer-term trend of steady growth,” it said.
Fitch noted “evidence of increasing market efficiency”, with structuring costs having fallen significantly, and deal making times down “from as much as six months to a few weeks”. It mentioned, however, the caveat of “the lack of legal precedent in many jurisdictions”.
Reported by Bloomberg, HSBC suggested issuance would probably rebound to a record level this year, echoing the idea of geographic dispersion, and observing banks trying to tailor conventional products to meet Sharia requirements, as in perpetual sukuk. US rate volatility might affect timing, but the pool of Islamic liquidity “remained strong”, and might be orientated to issuers in local currencies instead.
Moody’s has remarked on the increasing internationalisation of sukuk, and “growing investor comfort with these instruments”. Longer maturities beyond 5-7 years are appearing, and enhancing the sector’s appeal.
Like S&P, though, Moody’s saw the global market as “likely to remain fragmented”, a view which reflects awareness that differing locations around the world are tending to pursue their own respective efforts relatively independently.
As to the recent outcome, Kuwait Finance House reported that sukuk experienced a slight fall in volume in February, 3.1 per cent year-on-year at $9.07 billion, owing essentially to an easing in Malaysian issuance.
Late in the month, though, the Islamic Development Bank, based in Jeddah, priced a $1.5 billion, 5-year sukuk, the largest ever Islamic bond from the supranational lender, oversubscribed, and relatedly inside the pricing guidance given by lead managers and indeed IDB’s previous issue.
Increased volume and therefore tradability itself benefits the market, and enhances the scope for global investor education. Indeed the European and Asian subscriptions were similar, while the Middle East took the larger amount.
Otherwise, KFH noted two “landmark” corporate sukuk issuances in the GCC by National Commercial Bank, its SAR5bn being the largest by a financial institution in Saudi Arabia, as well as Dubai Investments Park’s $300m debut, which received a “tremendous response”.
Because of the international comparison with conventional bonds, meanwhile, secondary markets have shown a similar degree of relative buoyancy based on the steady but unspectacular nature of the world economic rebound.
It is still early, effectively, in the year, and it appears there is plenty of scope to expect sentiment shifts like the seasons once the direction of global economics, and global and frontier markets and appetites, become apparent.
For now, the market dynamics are roughly unchanged, according to S&P, contacted last week. “Issuances grew 15 per cent for the first two months of the year [year-on-year], totalling about $21bn to date. This is in line with our base-case scenario. Malaysia is leading the way [again].
We might see a gradual pick-up from private issuers, particularly in the Gulf. The sukuk pipeline also appears strong. We expect to see more and more sukuk listed in stock exchanges, [with] a push in Malaysia and Dubai to build markets with breadth and depth”.
