Dubai: Global sovereign sukuk issuance will recover in 2019 and surpass its record-high volumes by 2020, and possibly sooner, if oil prices remain moderate, according to rating agency Moody’s.

The recovery in issuance stems from higher deficit financing needs amid moderate oil prices, in particular for sovereign issuers in the GCC, higher sukuk refinancing needs especially in Malaysia, and a gradual increase in the share of sukuk in major issuers’ fiscal deficit financing.

“In the medium-term, gross issuance will rise further as the sukuk issued by the GCC governments begin to mature and are refinanced via new issuance,” said Alexander Perjessy, a Moody’s vice-president — senior analyst and author of the report.

Moody’s projects global sovereign sukuk issuance to increase to $87 billion in 2019, and rise toward $100 billion in 2020, from $78 billion in 2018. This recovery will be driven by a combination of various sovereigns’ commitments to further sukuk market development, higher sukuk refinancing needs and expectations of higher budget deficits for the major sovereign sukuk issuers in 2019-20.

“We expect the three largest issuers, Malaysia, Saudi Arabia and Indonesia, to gradually increase their share of sukuk in fiscal deficit financing, further supporting the market’s growth prospects,” said Perjessy.

In the medium term, total issuance is expected rise further, particularly when GCC sukuk instruments issued after 2016 begin to mature in 2022 and beyond and are refinanced by issuing new sukuk instruments.

By 2020, Moody’s expects total sovereign and supranational sukuk issuance, including short-term securities, to surpass the all-time high of $93 billion, reached in 2012, up from $78 billion in 2018. A deepening of the global sukuk market will allow sovereigns to diversify further their sources of financing. It will also provide a source that is more stable than conventional bonds given the strong structural demand for Sharia -compliant securities from Islamic financial institutions.

Global sovereign sukuk issuance, including long- and short-term sukuk issued by national governments, central banks and supranational organisations, declined by 5 per cent to $78 billion in 2018, from $82 billion in 2017. Total issuance was also almost $15 billion less than 2012’s all-time high of $92.8 billion.

According to Moody’s In 2018 an estimated gross issuance by GCC issuers were at $22.1 billion significantly lower than the previous year largely driven by higher oil revenues. “A one-third drop in GCC issuance, due to stronger fiscal positions on the back of higher oil prices in 2018, more than offset steady issuance growth in Malaysia and Indonesia. We estimate that the combined fiscal deficits of GCC sovereign sukuk issuers declined to $26 billion in 2018 from more than $98 billion in 2017,” said Perjessy.