Global sukuk sales, which plunged 15 per cent in the first half, will stall for the rest of the year due to higher interest rates and the Arabian Gulf’s lower financing needs, S&P Global Ratings said on Wednesday.
Total sukuk issuance in the first half fell to $44.2 billion from $52.2bn in the year-earlier period, while foreign currency Islamic bond sales had a steeper drop of 45 per cent during the same period, the rating agency said in a report. Volume issuance this year is expected to hover around the $70bn to $80bn mark, compared with $97.9bn last year.
“We expect sukuk issuance volumes will continue to be slowed by the global tightening of liquidity conditions as well as lower financing needs of some GCC countries as a result of oil price stabilising at higher levels,” S&P said. “The sharp increase in geopolitical risks in the Middle East will also likely weigh on investors’ appetite.”
Gulf countries ramped up their sales of sukuk last year as they sought to finance fiscal deficits due to lower oil prices. But the rebound in the oil prices, which touched $80 a barrel last month, has helped curtail the region’s need for more debt issuances.
Higher interest rates are dampening the appetite for debt issuances, particularly since the US Federal Reserve is set to raise its benchmark rates twice again this year, after two previous increases earlier this year on the back of a stronger economy.
GCC states, which peg their currencies to the US dollar except for Kuwait, usually mimic Fed moves and are expected to increase rates further this year.
“Overall, we think that the liquidity channelled to the sukuk market from developed markets will reduce and become more expensive,” said S&P. “Currently European and US-based investors account generally for about one-quarter of sukuk investment in terms of volume.”