An impending upturn in economic conditions in the GCC, Malaysia and Indonesia, on the back of record-low interest rates and abundant liquidity will spur the global sukuk market buoyancy with the value of total issuances forecast to reach $140 billion to $155 billion in the next 12 months, S&P Global Ratings said on Tuesday.
This compares with a drop in issuance to $139.8 billion in 2020 from $167.3 billion a year earlier. “We expect GDP growth in the core Islamic finance countries--the GCC countries, Malaysia, Indonesia, and Turkey--to recover from a sharp recession in 2020. We also assume that the price of oil will stabilize at about $50 per barrel in 2021,” the rating agency said.
While these factors underpin a stronger performance by the global sukuk market in 2021 than in 2020, downside risks for the core Islamic finance countries remain significant, according to Mohamed Damak, S&P primary credit analyst
A main risk is whether the Covid-19 pandemic can be brought under control, even if a vaccine is widely available by mid-year, which is our baseline assumption. Until then, the main risk is that further waves of Covid-19 and the requisite containment measures may harm the countries’ fragile economic recovery. “This could affect the countries directly or indirectly through lower commodity prices, exports, and capital flows.”
The rating agency noted that the number of defaults or restructurings among sukuk issuers with low credit quality will likely increase in 2021 as regulatory forbearance measures come to an end. “This will test the robustness of the legal documents used for sukuk issuances. However, if investors are able to get clarity on their financial recourse mechanisms because of these events, this will probably outweigh the negative impact on market sentiment.”
Over the next 12-18 months, there could be some progress on a unified global legal and regulatory framework for Islamic finance that the Dubai Islamic Economy Development Center (DIEDC) and its partners are developing.
“We believe that some sovereigns in the core Islamic finance countries will tap the sukuk market more aggressively in 2021. We also foresee an increase in issuance by corporates. Their activity was muted in 2020 as they held on to cash and deferred capital expenditure (capex) because of the pandemic. They are likely to execute some of this capex in 2021, thereby necessitating access to capital markets,” S&P said.
In 2021, $65 billion of sukuk will mature, and part of this sum is likely to be refinanced on the sukuk market, it said.
Kamco said in a recent study that budget spending needs by the government is expected to drive sovereign issuances next year. “However, with a significantly smaller expected deficit of around $84.3 billion in 2021 as against $127 billion in 2020, we expect government issuances to decline y-o-y in 2020.” A number of GCC governments have announced a cut in spending next year and to focus on priority projects.
In 2020, year to date, GCC governments have issued $47.5 billion in bonds with $35.4 billion during the first half of 2020. Sukuks issued by the governments stood at $28.7 billion and were almost equally split during the first half the second half of the year.
In 2020, the pandemic has resulted in almost 48 sovereign downgrades and 13 upgrades by the three rating agencies this year and numerous corporate downgrades globally. “However, with interest rates at one of the lowest levels, the cost of funding has not been significantly affected. In terms of ratings action in the GCC, Bahrain, Kuwait, Oman and Saudi Arabia witnessed downgrades by either one or more of the three rating agencies, especially around the peak of the pandemic,” said Kamco.