Tribune News Network
Doha
Global Sukuk issuance volumes will continue to decline in 2023, dropping to $155.8 billion in 2022 compared with $170.4 billion in 2021, according to S&P Global Ratings
"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,” the report prepared by a team led by S&P’s Primary Credit Analyst Mohamed Damak said.
Future standards development and certain Sharia scholars’ preference for a higher proportion of profit-and-loss sharing in sukuk have been cited as additional legal challenges.
However, S&P sees supportive factors in other areas.
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.”
World getting used to more expensive global
liquidity
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, the report said.
Reduced financing needs
High oil prices have boosted the balance sheets of several issuers in core Islamic finance countries. Moreover, in some, particularly Qatar and the United Arab Emirates (UAE), an investment cycle has just ended. In others, where government transformation visions are being implemented -- such as Saudi Arabia -- S&P expect some corporates to hit the sukuk market because the banking system won’t be able to absorb all the investments.
"We also expect the Saudi government to continue issuing sukuk in local currency to develop the local capital market, although recent pressure on banks’ liquidity resulted in lower activity than 2021.
Regulatory uncertainty still high
Sukuk are more complex and time-consuming than conventional bonds. Therefore, new issuers are mainly taking the Islamic route because they expect to increase their investor base compared with purely conventional transactions.
Regulatory uncertainty remains high and resides in the fragile equilibrium between making sukuk a fixed-income instrument and Sharia scholars’ push for more profit-and-loss sharing.
"In our view, if sukuk lose their fixed-income characteristics while adding significant risks compared to bonds they will become a less attractive option, reducing the market’s prospects.”
Sustainability Sukuk
becoming more prevalent
Despite the natural alignment of Islamic finance and sustainable finance, sustainability sukuk issuance remains limited, albeit expanding. From green to social, S&P expect to see higher volumes as issuers meet investor demands and core Islamic finance countries seek to reduce their carbon footprints.