S&P warns of slowdown threat to global sukuk issuance

Global sukuk issuance could be hampered this year by a slowdown in emerging markets as reduced confidence and low oil prices hit investor demand, the ratings agency Standard & Poor’s warns.

Between US$100 billion and $115bn of sukuk will be issued in 2015, S&P expects, roughly the same amount as over the past two years – confounding analyst estimates of double-digit growth for Islamic finance assets.

Corporate and sovereign sukuk are the most commonly issued Islamic financial products, and are principally used for project financing, or in lieu of issuing conventional bonds to raise capital.

Possible reductions in economic growth in Malaysia and the GCC, responsible for the majority of sukuk issuance, would hit both the demand for, and supply of, Islamic finance products, S&P said.

Low oil prices would be likely to affect the strength of Gulf banks, which have been a major force behind the growth of Islamic financial assets, a recent report from Thomson Reuters said. An increase in US interest rates could reduce global liquidity, further reducing demand for sukuk.

But other analysts have said that lower oil prices could actually spur sukuk issuance.

Bahrain and Oman are likely to need to issue more sovereign debt as a falling oil price, combined with low reserves and high spending plans, raises the spectre of a fiscal shortfall in both countries.

While expenditures are on track to exceed revenues this year in Qatar and Saudi Arabia, these countries have extensive foreign holdings moored in sovereign wealth funds that could be used to plug the gap.

The Gulf’s appetite for infrastructure is expected to spur debt issuance from government-related enterprises.

New sovereign issuers are also likely to enter the market this year.

Tunisia plans to issue a US$500 million sukuk in the third quarter of this year. Nigeria, Korea, Egypt, Mexico, Kazakhstan, Kenya, the Philippines and Thailand have each previously expressed interest in sovereign sukuk issuance, but have not yet done so.

The United Kingdom dipped its toes into Islamic capital markets last June with a £200m (Dh1.11 billion) sukuk which was 10 times oversubscribed.

Sovereigns are keen both to diversify their sources of funding, and to improve local Islamic capital markets.

Benchmark sovereign sukuk issues should help to improve liquidity, price transparency and risk evaluation for Islamic capital markets – vital for London, Dubai and Kuala Lumpur, which are vying to become global hubs for Islamic finance.

The UAE has insisted that state-owned companies increase issuance on the country’s domestic bourses, especially the Nasdaq Dubai, rather than listing on London exchanges.

The Emirates Securities and Commodities Authority published new regulations in April to make easier for sukuk to list on the country’s bourses.

Required minimum sukuk value to be listed on the UAE’s exchanges was reduced from Dh50m to Dh10m. Issuers would also have to list annual, rather than quarterly, financial reports.

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