Global sukuk's slump to slow, but not stop in 2023: S&P Global Ratings

Sukuk issuance volumes will continue declining this year to total about $150 billion as high inflation prompted major central banks to accelerate interest rate increases. This has reduced global liquidity and made it more expensive

In 2022, total sukuk issuance reached $155.8 billion versus $170.4 billion a year earlier. — Reuters

S&P Global Ratings believes that global sukuk issuance volumes will continue declining this year to total about $150 billion compared with $155.8 billion in 2022 and $170.4 billion in 2021, according to a new report.

"We expect lower and more expensive global liquidity, increased complexity, and reduced financing needs for issuers in some core Islamic finance countries to deter the market," said S&P Global Ratings credit analyst Mohamed Damak.

"However, we see supportive factors in other areas," he said.

High inflation prompted major central banks to accelerate interest rate increases. This has reduced global liquidity and made it more expensive. Investors' risk aversion has also increased, with major segments of capital markets (for example speculative-grade issuers) experiencing significantly lower activity in 2022 compared with 2021.

"The sukuk market, as a component of the global capital market, is not immune to these trends. We may see some upside in activity if inflation trends down sustainably and central banks slow the pace of their interest rate increases," according to the report.

S&P Global Ratings credit analyst Mohamed Damak said the sukuk market seems to be lagging the conventional one.

In 2022, total sukuk issuance reached $155.8 billion versus $170.4 billion a year earlier. Declines occurred in most core Islamic finance countries, with only a few exceptions such as Malaysia (higher growth) and Turkey (pursuing all financing sources available) seeing marginally higher numbers. More importantly, issuance in foreign currency plummeted.

"We expect this trend to continue in 2023 and forecast sukuk issuance will reduce again to $150 billion, with further risks building," the report said.

Corporates to contributes

Corporates are likely to contribute to issuance volumes, particularly in countries with government transformation visions or plans, such as Saudi Arabia, where well capitalised banking systems will not have the capacity to finance all the projects.

"We also see continued momentum via the energy transition and increased awareness of environmental, social, and governance considerations among issuers in key Islamic finance countries.

"However, the sukuk market seems to be lagging the conventional one when it comes to automation and issuance of digital instruments, which could accelerate growth and make the process more appealing," Damak concluded.

— muzaffarrizvi@khaleejtimes.com