Dubai: Despite a bleak 2015, key sukuk market players remain hopeful for robust year ahead with expectations of oil-exporting countries in core markets to turn to sukuk as a primary debt management tool, according to a recent survey by Thomson Reuters.
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.
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 (Dh146 billion) from $48.8 billion for the same period in 2015.
“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,” said Nadim Najjar, Managing Director, Middle East & North Africa, Thomson Reuters.
According to Thomson Reuters, 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,” said Najjar.
Projected to recover
The study 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 forecast to be $143.1 billion in 2017, increasing to $178.4 billion in 2018 and reaching US$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 capitalise on increasing demand from Islamic investors. This growth in supply is expected to remain steady over the following 4 years (2018 to 2021).
Trends in the market points to 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 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 7 per cent as the shares of both sovereign and corporate issuances declined.
