Sukuk issuance is set to rise 6 per cent to $130 billion (Dh477bn) this year, a fourth consecutive annual increase, driven by strong activity in Saudi Arabia and Malaysia, Moody’s Investors Service said in a report.
The credit rating agency expects GCC countries to continue issuing sukuk, a Sharia-compliant alternative to conventional bonds, for the rest of the year as lower oil prices and expansionary budgets mean governments are tapping debt markets for funding. They are also issuing more sukuk to diversify their funding mix and develop the Islamic debt markets.
“Increased activity in Saudi Arabia and Malaysia helped drive strong issuance of $87bn in the first six months and this has reduced funding needs,” said Nitish Bhojnagarwala, vice president and senior credit officer at Moody’s.
“We therefore expect second-half volumes to moderate to around $43bn, though Malaysia and Gulf Co-operation Council countries, particularly Saudi Arabia, will continue issuing regularly.”
Total sukuk volumes grew to $87.4bn in the first half of the year, from $64bn in the same period of 2018. The increase was driven by the GCC, where issuance rose 9 per cent to $26.5bn; South-East Asia, where it grew 41 per cent to $53bn; and Turkey, where sukuk issuance grew 300 per cent to $7.9bn.
Saudi Arabia accounted for only under half of the wider GCC region's first half issuance, with volumes of $12.8bn, up from $11bn in the same period of 2018. The Saudi government accounted for around 75 per cent of the issuance.
Total Saudi government issuance over the last year and first half of 2019 combined was around $28bn, according to Moody's.
The report also said that new entrants and green sukuk initiatives could stimulate issuance, with some African sovereigns likely to enter the market, and Egypt setting up a Sharia supervisory committee in April to oversee sukuk issuance.
While the green sukuk market is in its infancy, issuance is likely to accelerate as efforts to combat climate change gain traction, building on initial green sukuk transactions in Malaysia and Indonesia, the report said.
As of March, green sukuk accounted for less than 1 per cent of green bonds and sukuk combined. The most recent green sukuk transaction was a $750 million issuance from the government of Indonesia in February. The Indonesian government also placed the world's first sovereign green sukuk, a $1.25bn five-year instrument, in February 2018 to finance green projects.
“The Malaysian and Indonesian precedents could encourage other issuers to enter the green sukuk market, in particular GCC governments, which aim to diversify their economies away from the oil industry,” Moody’s said.
Many organisations in the Middle East and North Africa, including Saudi Arabia’s Islamic Development Bank and Islamic Corporation for the Development of the Private Sector may also explore ways of diversifying their investment portfolios into the renewable energy sector, contributing further to the growth of the green sukuk market.
In May, Dubai's Majid Al Futtaim Group, issued the first corporate green sukuk in Mena, a $600m, 10-year instrument listed on Nasdaq Dubai.