Fewer sales from GCC sovereigns is due to lower funding needs
Global sukuk issuances to remain flat in 2018 on higher oil prices
Global sukuk issuances in 2018 are forecast to remain flat at $90-$100 billion compared with previous year as higher oil prices lower the need of Arabian Gulf sovereigns to raise funding, according to a new report from Moody’s Investors Service.
"The decrease in sukuk issuances during the first half of 2018 was driven by lower volumes from the Gulf Cooperation Council (GCC) region," said Moody's Investors Service.
With the rebound in oil prices following a three year slump, the energy-rich Gulf region is benefiting from higher oil prices. Benchmark Brent is up 18 per cent so far this year and the increase in income from hydrocarbons will help plug fiscal deficits that widened the previous three years from the collapse of oil prices that started in mid-2014.
The rating agency said some catalysts for sukuk issuance include the July launch of a primary dealers programme for government sukuk in Saudi Arabia and the start of sukuk trading on the Turkish stock exchange in August.
"Over the long-term, we expect sukuk issuance volumes to continue to grow as governments across the core Islamic finance markets shift their financing mix towards a combination of conventional and Islamic instruments," says Nitish Bhojnagarwala, a vice president and senior credit officer at Moody's.
Sukuk issuances, which fell 12 per cent in the first half of this year to $55bn, will pick up in the second half with sales from Indonesia and Malaysia, the world’s biggest Islamic bond issuer, Moody’s said. Unlike conventional bonds, Islamic bonds are backed by tangible assets and do not pay interest because it is deemed illegal under Islamic Sharia law.
The market will also benefit from the emergence of green sukuk, which is an Islamic bond that finances environmentally-friendly projects. Malaysia, which accounts for 41 per cent of the world's sukuk market, issued the first green sukuk last year while Indonesia launched the first sovereign green sukuk this February.
“Green sukuk issuance is set to accelerate in Malaysia and Indonesia as governments in both countries seek to promote sustainable policy agendas by attracting private capital into low-carbon and climate-resilient infrastructure projects,” Moody’s said. “The Malaysian and Indonesian precedents could encourage other issuers to enter the green sukuk market, in particular GCC governments, which aim to diversify their economies away from the oil industry.”