Global sukuks set to stage strong recovery this year
Hard currency sukuk sales climb in first half, further growth seen, says S&P Global Ratings
Global sukuks are expected to stage strong recovery this year due to favourable market conditions following a steady growth in first half, says a report.
S&P Global Ratings on Monday said that they believe market conditions will remain supportive for sukuk issuance in the second half of 2021, with low interest rates and abundant liquidity.
The rating agency also expect that most Islamic finance countries will continue vaccinating their populations and that oil prices will stabilise at about $65 per barrel for 2021. Taken together, these factors point to stronger sukuk market performance in 2021 compared with 2020.
“We expect sukuk issuance will reach $140 billion-$155 billion in 2021, compared with $139.8 billion in 2020. In first half of 2021, sukuk issuance totalled $90.6 billion, compared with $86.4 billion at June 30, 2020, thanks to Malaysian and Saudi Arabian issuances,” said S&P Global Ratings credit analyst Mohamed Damak.
The rating agency said foreign currency-denominated Islamic bond sale volumes rose 41.6 per cent in the first half of 2021 as some issuers closed jumbo sukuk sales in a low-interest rate market flush with liquidity.
Sukuk issuance rose five per cent during the January-June 2021 compared with a year earlier, while upbeat market conditions were expected to support further Islamic bond sales in the second half. Primary sukuk sale volumes rose 20 per cent in the same period, the rating agency said.
Sukuk drop in UAE
“By contrast, we saw a 50 per cent drop in sukuk issuance in the UAE due to the adoption of the Accounting and Auditing Organisation for Islamic Financial Institutions’ Shariah Standard 59. Although issuers have found ways to comply with the standard, additional challenges persist. In our view, investors are also now more exposed to residual asset risks,” Damak said.
Sukuk sales also fell in Bahrain, Indonesia and Turkey in the first half.
The rating agency said it expects Gulf governments to continue tapping the debt markets despite higher oil prices, with Brent crude trading around $76 on Monday, and as a result lower fiscal deficits.
“More broadly, downside risks for the sukuk market remain but they are slowly shifting toward traditional factors such as geopolitical concerns and oil price fluctuations. Notably, the evolution of the pandemic also remains a relevant concern,” he added.
The rating agency also expects bank and corporate issues will support the sukuk market in the second half, after corporate activity was muted in the first half of 2020 as companies turned to save cash and suspend spending in the face of the pandemic.
“Although issuers have found ways to comply with the standard, additional challenges persist. In our view, investors are also now more exposed to residual asset risks,” S&P said.
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