Demand for Sharia-compliant financing is set to outpace conventional funding in 2023, driven by strong economic growth and development agendas in key markets including Saudi Arabia amid higher oil prices, Moody’s Investors Service has said.
Global sukuk issuance this year is forecast to “level off” in the range of $170 billion to $175 billion in 2023, supported by sovereign financing needs in key Asian markets of Malaysia and Indonesia and resilient demand from banking and corporate sectors, Moody’s said in a research note on Wednesday.
The levelling off of sukuk volumes follows a 10 per cent fall in 2022 to $178 billion given lower funding requirements from the six-member economic bloc of GCC region and South-east Asian markets.
“We expect Islamic banking in key markets to keep growing faster than conventional peers supported by robust economic activity in South-east Asia and the GCC region,” Ashraf Madani, vice president and senior credit officer at Moody’s, said.
“This will be driven by high commodity prices and governments' economic diversification agendas; sovereigns’ continued backing and promotion of the Islamic finance industry and growing demand for Sharia-compliant products.”
Although Saudi Arabia, the biggest Arab economy and the Opec’s leading oil exporter, and Malaysia will continue to lead sukuk issuances, the potential for growth in other jurisdictions also remains high, he said.
Long-term sovereign sukuk issuance will also stabilise in 2023 after two years of declines at around $80 billion level, before rising to around $80 billion to $85 billion in 2024.
The levelling off of global long-term sovereign sukuk issuance volumes at around last year's level follows the declining trend since the all-time high hit in 2020.
Issuance volumes fell 22 per cent to $80 billion in 2022 as significantly higher energy-related government revenue pushed fiscal deficits into surpluses for most GCC sovereigns and helped reduce fiscal deficits in Malaysia and Indonesia.
The post-pandemic economic recovery also supported stronger fiscal performance, which slashed the net financing needs of major sukuk-issuing governments.
Malaysia, Indonesia and Turkey are expected to be the largest sovereign issuers this year and next, Moody’s said in a separate report.
Supportive hydrocarbon prices continue to bolster fiscal balances of energy-exporting sovereign sukuk issuers. With most GCC sovereigns still recording budget surpluses this year and in 2024, Moody’s expects their issuances to be mainly driven by the need to either refinance or repay maturing sukuk.
“We expect significantly lower gross issuance from GCC to be broadly offset by higher volumes elsewhere, particularly in Indonesia, where domestic sukuk issuance dipped significantly in 2022,” Alexander Perjessy, senior credit officer at Moody’s, said.
Oil prices that surged more than 60 per cent in 2021, continued the upwards momentum in 2022. The wild swings triggered by Russia’s assault on Ukraine that pushed Brent to a notch under $140 per barrel settled towards the end of last year and the benchmark for two thirds of the world’s closed 2022 at about $80 per barrel mark.
It is still trading at more than $83 a barrel level, which supports the budgets of energy-exporting nations of the Gulf region. Continuing current account surpluses also give GCC sovereigns the financial muscle to implement their development agendas, which they are partly funding through a combination of conventional and Islamic financing.
Despite lower funding requirements in 2022, GCC countries, along with Malaysia and Indonesia, remained the largest issuers of sovereign sukuk. Together they accounted for 77 per cent of total long-term gross sovereign sukuk issuance and 87 per cent of outstanding long-term sovereign sukuk issuance at the end of last year, according to Moody’s data.
Within the GCC, Saudi Arabia was the single largest issuer since the launch of its domestic riyal-denominated sukuk issuance programme in 2017, accounting for 78 per cent of outstanding government sukuk sold in the region and 34 per cent of government sukuk issued globally.
“Malaysia, Indonesia and Turkey were the next three largest sovereign issuers in 2022, with market shares of 25 per cent, 19 per cent and 5 per cent, respectively,” Moody’s analysts said.
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A widely accepted definition was made by the All Party Parliamentary Group on British Muslims in 2019: “Islamophobia is rooted in racism and is a type of racism that targets expressions of Muslimness or perceived Muslimness.” It further defines it as “inciting hatred or violence against Muslims”.
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Mercer, the investment consulting arm of US services company Marsh & McLennan, expects its wealth division to at least double its assets under management (AUM) in the Middle East as wealth in the region continues to grow despite economic headwinds, a company official said.
Mercer Wealth, which globally has $160 billion in AUM, plans to boost its AUM in the region to $2-$3bn in the next 2-3 years from the present $1bn, said Yasir AbuShaban, a Dubai-based principal with Mercer Wealth.
“Within the next two to three years, we are looking at reaching $2 to $3 billion as a conservative estimate and we do see an opportunity to do so,” said Mr AbuShaban.
Mercer does not directly make investments, but allocates clients’ money they have discretion to, to professional asset managers. They also provide advice to clients.
“We have buying power. We can negotiate on their (client’s) behalf with asset managers to provide them lower fees than they otherwise would have to get on their own,” he added.
Mercer Wealth’s clients include sovereign wealth funds, family offices, and insurance companies among others.
From its office in Dubai, Mercer also looks after Africa, India and Turkey, where they also see opportunity for growth.
Wealth creation in Middle East and Africa (MEA) grew 8.5 per cent to $8.1 trillion last year from $7.5tn in 2015, higher than last year’s global average of 6 per cent and the second-highest growth in a region after Asia-Pacific which grew 9.9 per cent, according to consultancy Boston Consulting Group (BCG). In the region, where wealth grew just 1.9 per cent in 2015 compared with 2014, a pickup in oil prices has helped in wealth generation.
BCG is forecasting MEA wealth will rise to $12tn by 2021, growing at an annual average of 8 per cent.
Drivers of wealth generation in the region will be split evenly between new wealth creation and growth of performance of existing assets, according to BCG.
Another general trend in the region is clients’ looking for a comprehensive approach to investing, according to Mr AbuShaban.
“Institutional investors or some of the families are seeing a slowdown in the available capital they have to invest and in that sense they are looking at optimizing the way they manage their portfolios and making sure they are not investing haphazardly and different parts of their investment are working together,” said Mr AbuShaban.
Some clients also have a higher appetite for risk, given the low interest-rate environment that does not provide enough yield for some institutional investors. These clients are keen to invest in illiquid assets, such as private equity and infrastructure.
“What we have seen is a desire for higher returns in what has been a low-return environment specifically in various fixed income or bonds,” he said.
“In this environment, we have seen a de facto increase in the risk that clients are taking in things like illiquid investments, private equity investments, infrastructure and private debt, those kind of investments were higher illiquidity results in incrementally higher returns.”
The Abu Dhabi Investment Authority, one of the largest sovereign wealth funds, said in its 2016 report that has gradually increased its exposure in direct private equity and private credit transactions, mainly in Asian markets and especially in China and India. The authority’s private equity department focused on structured equities owing to “their defensive characteristics.”
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COMPANY PROFILE
Name: Lamsa
Founder: Badr Ward
Launched: 2014
Employees: 60
Based: Abu Dhabi
Sector: EdTech
Funding to date: $15 million
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