Dubai: Weak global oil prices and shrinking government spending across the GCC and Malaysia are expected to keep the global market for sukuk at below-peak levels in 2016 according to rating agency Standard & Poor’s.
Total issuance this year is expected to reach $50 to $55 billion (Dh183.65-Dh202 billion), compared with $63.5 billion in 2015 and $116.4 billion in 2014.
The correction started last year, mainly because Malaysia’s central bank Bank Negara Malaysia (BNM), the largest issuers of sukuk worldwide, stopped issuing. Excluding the BNM effect, sukuk issuance dropped by around 5 per cent in 2015 from 2014.
Factors such as monetary policy developments in the US and Europe, drop in oil prices and possible lifting of Iran sanctions are going to be the key drivers impacting sukuk this year. While the first two factors are likely to drain liquidity from global and local markets, fiscal consolidation and spending cuts across the GCC are expected to drive down demand for funds.
“We think that if oil prices remain weak, some governments of oil-exporting countries in the GCC and Malaysia may have no other choice than to reduce investment spending, resulting in lower financing needs and potentially lower issuances,” said Mohammad Damak, Standard & Poor’s Global Head of Islamic Finance.
The drop in oil prices is also reducing deposits and therefore liquidity at banks (including Islamic banks). Governments and their related entities are among the top depositors in some of the core markets for Islamic finance, with a share of 15 per cent to 40 per cent for GCC banks. “We expect that lower liquidity will lead investors to become more prudent about risk and more selective, which will push up prices,” said Damak.
Rate increases by the Fed will also bring a drop in global liquidity that will reduce global investor appetite for sukuk and push up prices.
The complexity of structuring sukuk issues and the ensuing longer time to market is deterring some issuers. “Some market participants believe that the weaker economic outlook due to lower oil prices could boost sukuk issuance as governments seek to finance their funding needs. However, we think conventional issuance could be the first to benefit from such a trend,” Damac said.
In 2015, conventional issuance in the GCC was up by about 140 per cent versus a 22.4 per cent drop in sukuk issuance.
Amid the overall gloom, one positive driver could be the European Central Bank’s quantitative easing (QE) that might prompt some European investors to take positions on higher-yielding but riskier emerging-markets assets such as sukuk.
Over the next few years, S&P expects the global sukuk market to benefit from the greater involvement of traditional stakeholders such as the Islamic Development Bank Group, the Islamic Financial Services Board (IFSB), the Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI), and the International Islamic Financial Market (IIFM) — as well as new ones like the International Monetary Fund (IMF). These institutions are now working on several projects to strengthen the foundations of the Islamic finance industry and prepare it for greater innovation and accelerated growth.
