Fitch Ratings said it expects sukuk issuance in 2017 to continue at the same pace like last year even as market share will rise as more sovereigns issue sukuk alongside conventional bonds.

Sukuk issuance in core markets rose by 26 per cent in 2016 and broadly maintained its share of capital markets funding despite large conventional bond issues by Saudi Arabia, Abu Dhabi and Qatar, according to the ratings agency.

New sukuk issuance with a maturity over 18 months from the core markets of the Gulf Cooperation Council (GCC) region, Malaysia, Indonesia, Turkey and Pakistan rose to $40 billion in 2016 from about $32 billion a year earlier. This represented 28.5 per cent of total bond and sukuk issuance in these markets in 2016, down marginally from 29 per cent in 2015.

“We focus on longer-term issuances because frequently rolled-over short-term debt can distort underlying trends,” Fitch Rating said in a statement.

The proportion would have been higher, but for the return of Saudi Arabia, Abu Dhabi and Qatar to the sovereign bond market with combined issuance of $31.5 billion. They probably opted for bond financing to attract international investors. However, seven of 10 key markets did issue sovereign sukuk in 2016 and other sovereigns in the GCC region have indicated they could issue sukuk, or a mix, in the future, reinforcing our view that the market share of sukuk will gradually rise. Oil exporters in the Middle East are also becoming an important source of the flow of international bond and sukuk issuances, and that trend should continue.

Sovereigns and supranationals are likely to remain the dominant issuers, but bank issuance may also rise in some markets, driven by issuance to meet regulatory capital requirements. Basel III implications for liquidity are fairly significant in GCC countries as banks have a substantial contractual maturity mismatch between medium-term lending and very short-term customer deposits, the ratings agency said.