Uptick in sukuk issuances as global recovery gains traction

Global sukuk issuances, which surged 39 per cent to $250 billion in 2021, will continue to grow this year as economies recover from the coronavirus pandemic.

“Market activity continues to grow, global sukuk issuance was near $40 billion in January/February 2022, more than 7.0 per cent higher than the same period in 2021,” the Institute of International Finance (IIF) said. The majority of issuances came from Pakistan, Indonesia, Malaysia, the GCC countries and Turkey.

A separate report by Fitch Ratings said that global sukuk issuances surged by 36.1 per cent in 2021 to $252.3 billion and are expected to continue to grow this year. Robust Islamic investor appetite, a diversification in funding goals and Islamic-finance development agendas are expected to drive the growth of sukuk issuance in the region.

“Downside risk stems from higher oil prices reducing a number of sovereigns’ funding needs, AAOIFI (Accounting and Auditing Organisation for Islamic Financial Institutions) compliance complexities, traditional risks such as interest-rate rise, lower global investor appetite for emerging-market debt and political risk,” said Fitch.

However, according to Moody’s Investors Service, the global long-term sovereign sukuk issuance is set to drop to $73 billion in 2022 and $75 billion in 2023, from $88 billion in 2021, including issuance by multilateral development banks.

“We expect issuance to fall as government deficits continue to narrow because of higher oil prices, lower coronavirus-related expenditure and accelerating economic activity in core sukuk-issuing countries,” said Alexander Perjessy, vice president, senior analyst at Moody’s.

Issuance volumes already dropped 22 per cent in 2021, with the largest decline from the GCC sovereigns, mainly Saudi Arabia.

Moody’s estimates that the aggregate fiscal deficit of major sukuk-issuing sovereigns — Saudi Arabia, Malaysia, Indonesia and Turkey —will decline to $92 billion in 2022 from $118 billion in 2021 and $194 billion in 2020. The aggregate fiscal positions of the GCC sovereigns, excluding Kuwait, will improve to a surplus of $50 billion in 2022 from a surplus of $13 billion in 2021 and a deficit of $112 billion in 2020. These projections are based on the 2022 average oil price assumption of $75 per barrel.

New entrants into the sovereign sukuk market present a small upside risk to our issuance projections. The potential passage of Kuwait’s new public debt law and Egypt’s recent approval of the Sovereign Sukuk Law will support these countries’ sovereign sukuk issuances in the medium term.

— issacjohn@khaleejtimes.com