MANAMA: A healthy pipeline of US$32 billion is already in place for 2016, according to a latest report published by Thompson Reuters on the sidelines of the World Islamic Banking Conference 2016 (WIBC 2016).
The pipeline is made up of a mixture of governments and corporates. Some of the potential issuers in the pipeline include countries such as Egypt, Tunisia, Thailand, South Korea and Ivory Coast. There are also quasi-sovereign issuers from Bahrain, Azerbaijan and Malaysia. Corporate issuers make up most of the list with countries from both traditional and non-traditional markets and from different sectors.
“In the era of low oil prices and anticipation of increasing interest rates the outlook for the global sukuk market remains positive. We see the drop-in oil prices as a double-edged sword; many oil-exporting countries, such as Bahrain and Saudi Arabia, have started considering sukuk as a source of funding to cover their budget deficits. At the same time, the oil price drop could hurt their credit ratings; this has already happened — at the end of October Standard & Poor’s downgraded Saudi Arabia’s sovereign rating, citing a “pronounced negative swing” in the Kingdom’s fiscal balance.
The increase in global interest rates is another concern both issuers and investors are closely following as any increase in interest rates will have implications on sukuk. However, the only factor distinguishing sukuk from other instruments is its demand. This could be an advantage for issuers, who will be able to capitalize on limited investment options available to Shariah-sensitive investors and secure better pricing.
“This is the fourth consecutive Sukuk Perceptions & Forecast Study published by Thomson Reuters. In this 2016 study, we continue to provide forward-looking analysis of the global sukuk market, including insights from a wide range of investors and issuers through our Sukuk Survey, as well as market opinion through leadership articles and interviews with key market players.
A buoyant 2014 had sukuk market players optimistic for another robust year but market uncertainty, especially with the drop-in oil prices and the expected increase in global interest rates, have dampened activity in the market.
The global sukuk market in 2015 welcomed significantly fewer new issuers compared to 2014. In fact, there was only one new issuer — the Omani government, which issued its debut sovereign sukuk in October, 2015 (Oman’s first sukuk was a corporate issuance from Al Tilal Development Company in 2013).
Total sukuk issued in the first 9 months of 2015 significantly dropped by 38.6% to $48.8 billion compared to $79.5 billion for the same period in 2014. Sukuk issuances will not break the $100 billion mark, much less surpass the $114.08 billion chalked up in 2013.
There are two fundamental reasons for this plunge in issuance: the decision by Bank Negara Malaysia (BNM) to stop offering short-term sukuk, and the dearth of new players which has limited the market’s outreach. While a measurement of the volume of sukuk is needed to assess year-on- year growth, we stress the importance of new issuers to the global sukuk market as a gauge of the widening acceptability of the instrument.
By sectors, Financial Institutions (FIs) lead all corporate issuances for the first 9 months of 2015, followed by Transport, Construction, Real Estate and Conglomerates. The market welcomed 2 new sectors in 2015: Information Technology and Consumer Goods, both represented by Malaysian companies.
Ample liquidity, limited investment options and a supply shortage are driving demand. The shortage has forced many investors to hold on to their sukuk, resulting in a paucity of trading in the secondary markets.
Despite the drop-in issuance, Malaysia remains the most liquid sukuk market, making up approximately 50% of the global sukuk market, thanks to strong primary market issuance and secondary market infrastructure.
The decision by Bank Negara Malaysia (BNM) to stop offering short-term sukuk has created an impediment for many investors, especially those from the Middle East who were comfortable deploying their excess cash in these short-term sukuk.
“Based on growth trajectories we have revised our forecast for the sukuk supply and demand gap given global market conditions. We forecast the gap for the next 5 years to be $90.2 billion in 2015, growing to $179.7 billion in 2018, and $$253.7 billion in 2020.