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Higher oil prices lead to drop in GCC sukuk issuance in first half

Issac John /Dubai
issacjohn@khaleejtimes.com Filed on September 7, 2021

Moody's said issuance in the UAE and Bahrain declined 65 per cent to $4 billion in the first half while across the globe it remained solid and expects to consolidate in 2021 following 2020's record issuance


Higher oil prices have reduced sovereign funding needs in the GCC countries in the first half, leading to flat or slightly lower global sukuk issuance this year, Moody's Investors Service said in a report on Tuesday.

The adoption by the UAE of certain Shariah-compliance standards (the Accounting and Auditing Organization for Islamic Financial Institutions' Sharia Standard 59) has also slowed issuance of sukuk from the Gulf, according to Reuters quoting unnamed sources.

Moody's said issuance in the UAE and Bahrain declined 65 per cent to $4 billion in the first half while across the globe it remained solid and expects to consolidate in 2021 following 2020's record issuance.

"Sukuk issuance will be flat or slightly lower this year, as higher oil prices have reduced sovereign funding needs in the GCC countries," said Ashraf Madani, a vice president and senior analyst at Moody's and the author of the report.

"We expect total gross short- and long-term sukuk issuance in 2021 to reach between $190 billion and $200 billion after a record $205 billion in 2020."

"Reduced issuance from GCC (governments was partly offset by stronger activity in the corporate sector," Moody's said.

Improving economic conditions and high funding needs will support issuance activity in Southeast Asia. Malaysia will continue to dominate global sukuk issuance with activity primarily denominated in local currency.

Moody's expects the sukuk market to maintain its long-term growth trend, backed by new entrants, low penetration and innovative new Islamic products, such as green and sustainable sukuk.

The expected volume is despite issuance increasing in the first half of the year by 3.0 per cent to $102 billion, driven by sales from Malaysia and Indonesia. Issuance volume in Southeast Asia, which made up more than half of total issuance in the first half, increased 22 per cent while in the Gulf it declined 19 per cent.

Moody's sees total sukuk issuance this year between $190 billion and $200 billion from a record $205 billion last year, as continued large financing needs in Malaysia and Indonesia will drive strong issuance from that region.

Issuance will also be helped by continued economic recovery, better liquidity in the debt markets and strong investor demand, which has long outstripped the supply of sukuk.

The economies of the heavily hydrocarbon-dependent Gulf were battered by the double shock of last year's historic oil price crash and the Covid-19 pandemic.

Brent crude is now trading at around $72, roughly double lows reached in March last year, while activity in non-oil sectors in the Gulf has also begun to recover.

According to S&P Global Ratings, global market conditions will remain supportive for sukuk issuance in second-half 2021, with low interest rates and abundant liquidity.

Most Islamic finance countries will continue vaccinating their populations and oil prices will stabilise at about $65 per barrel for 2021, said the report titled “The global sukuk market is returning to traditional risks”.

Taken together, these factors point to stronger sukuk market performance in 2021 compared with 2020, S&P added.

"We expect sukuk issuance will reach $140 billion-$155 billion in 2021, compared with $139.8 billion in 2020. In first-half 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.

“By contrast, we saw a 50 per cent drop in sukuk issuance in the UAE due to the adoption of the Accounting and Auditing Organization for Islamic Financial Institutions' Sharia 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.

“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," Damak said.

— issacjohn@khaleejtimes.com

author

Issac John

Editorial Director of Khaleej Times, is a well-connected Indian journalist and an economic and financial commentator. He has been in the UAE's mainstream journalism for 35 years, including 23 years with Khaleej Times. A post-graduate in English and graduate in economics, he has won over two dozen awards. Acclaimed for his authentic and insightful analysis of global and regional businesses and economic trends, he is respected for his astute understanding of the local business scene.





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