Global sukuk issuance is forecast to decline by about 10 per cent this year on lower volumes from major sovereign issuers including the GCC countries and South-East Asia as their fiscal positions continue to improve on higher oil prices and sustained economic growth.
The total gross short and long-term sukuk issuance is expected to fall between $150 billion and $160 billion in 2023, from $178 billion last year, Moody’s Investors Service said on Monday.
Issuance activity was $66 billion in the first half of the year, down from $92 billion in 2022, “as lower than expected sovereign activity in the GCC and South-East Asia more than offset a strong rebound by corporates and financial institutions issuers”, the rating agency said.
However, the total issuance is expected to rise in the second half to between $80 billion and $90 billion, supported by a partial rebound in South-East Asia and Turkey as well as sustained strong volumes from corporates and financial institutions, according to Moody's.
“In the first half of 2023, sukuk issuance declined … reflecting muted activity in Saudi Arabia, Indonesia and Turkey amid robust commodity prices,” said Ashraf Madani, vice president and senior credit officer at Moody’s.
“Increased volumes from financial institutions and corporates, driven by first-time issuers, refinancings of near-term maturities and delayed issuances finally coming to market, was not enough to compensate for the decline.”
In the first half, the largest decline came in the GCC, where total issuance fell 33 per cent to $29.8 billion, while volumes in South-East Asia fell by a lower 22 per cent to $31.7 billion.
“Supportive hydrocarbon prices continued to strengthen the fiscal balances of hydrocarbon exporting GCC sovereigns and will translate into budget surpluses this year, considerably reducing the need to issue sukuk,” Moody's said.
Oil prices are currently trading higher on tightening crude supplies amid production cuts by Opec and its allies including Russia and other countries.
Brent, the benchmark for two thirds of the world’s oil, was at $88.54 per barrel at 5.12pm UAE time, while West Texas Intermediate, the gauge that tracks US crude was at $85.52 per barrel.
Saudi Arabia's economy, the biggest in the Arab world, expanded 8.7 per cent in 2022, the highest annual growth rate among the world's 20 biggest economies, driven by a rise in oil prices and the strong performance of its non-oil private sector.
The UAE's GDP grew by 7.9 per cent in 2022, the most in 11 years, to Dh1.62 trillion at constant prices, supported by the non-oil sector. The UAE economy is expected to expand by 3.3 per cent this year and 4.3 per cent next year, according to Central Bank data.
Saudi Arabia registered the largest decline in issuance in the GCC, with volumes falling 41 per cent to $15 billion in the first half as a result of “a fall in sovereign volumes, which reduced to $8 billion from $24.5 billion a year earlier, the lowest level since the launch of the domestic Saudi riyal-denominated sukuk programme in 2017", Moody's said.
Issuance activity in the UAE, on the other hand, rose 82 per cent to $4.3 billion, mainly due to higher volumes on the corporate and banking side.
“Overall, we remain positive on the long-term prospects for sukuk,” Mr Madani said.
“The instruments represent a good alternative to conventional financing and are highly compatible with environmental, social and governance principles. They also offer privileged access to the Gulf region, where significant financial reserves and solid economic prospects are attracting investors in increasing numbers.”
Green sukuk is expected to accelerate in the coming years, supported by both governments and private sector issuers, as sustainability becomes a “key theme in public policy agendas, as well as investors' strategies”, Moody's said.
After reaching a plateau in 2021-22, green and sustainable sukuk issuance picked up again in the first half of 2023 to $6 billion from $4 billion a year earlier.
Issuance has increased significantly in Saudi Arabia and the UAE, where governments are actively promoting sustainable investments ahead of the Cop28 summit in November.
In July, Abu Dhabi Islamic Bank raised $750 million through the issuance of Sharia-compliant bonds as the biggest Islamic lender by assets in the emirate continues to diversify its funding base.
Majid Al Futtaim Holding, one of Dubai's biggest private sector companies and the Middle East's largest mall operator, also raised $500 million through a green sukuk, its fourth in about four years, as it continues to diversify its funding base.