Slowdown in sukuk issuance, yields come down


Standard & Poor

KUALA LUMPUR: The strong demand for Islamic debt papers by foreigners appears to be reaching a plateau.

According to analysts, the demand for Islamic bond papers from foreign investors in the last one year has pushed up prices and subsequently the yields have come down.

“For one thing, Malaysian Islamic papers have been included in the Barclays Global Aggregate Index since March 31, hence giving more visibility for Malaysian sukuk among investors who follow the index,” said Nik Ahmad Mukharriz Nik Muhammad a bond analyst at CIMB Bank.

“We had expected the yield spread between Islamic bonds and conventional bonds to narrow over time,” he added.

Standard & Poor’s (S&P) Ratings Services foresees the global sukuk market heading towards a correction in 2015 after Bank Negara – one of the largest issuers of sukuk worldwide – stopped issuing the bond earlier this year.

In its report issued yesterday, the international ratings agency said Bank Negara’s move leaves the door open to issuers such as the International Islamic Liquidity Management Corp and the Islamic Development Bank to step up their issuance and provide the industry with liquidity, thereby contributing to the development of an Islamic yield curve.

“In the first half of 2015, Bank Negara’s pullback saw total sukuk issuance drop by 42.5% compared with the same period a year earlier,” said S&P global head of Islamic finance Mohamed Damak.

“In 2014, Bank Negara alone issued about US$45bil (RM171bil) of sukuk out of a total issuance of US$116.4bil. We understand part of the reason behind Bank Negara’s decision was that its sukuk were subscribed to by a broad array of investors, preventing them from reaching their intended end-users (primarily Malaysian Islamic banks for liquidity management purposes). As a result, Bank Negara decided to switch to other instruments restricted to banks,” it said.

Excluding the Bank Negara effect, the worldwide volume of sukuk issuance performed in line with its expectations, total issuance dropping by only 10.7%, confirming that the impact of falling oil prices on recurring government spending and investment projects in core markets (namely Gulf Cooperation Council countries and Malaysia) was limited in the first half of 2015.

S&P said while it expected this trend to continue in the second half of 2015, the effect of lower oil prices on sukuk issuance in 2016 remained uncertain.

Such an effect will depend on whether there is a recovery in oil prices or whether governments in core markets decide to reprioritise their spending and avoid continuing using their reserves and tap the capital markets more aggressively to finance their spending.

Sukuk market performance in the first half of this year was aided by returning sovereign issuers (from core and non-core markets) and large, albeit sporadic issuances from banks and a few non-financial companies (corporates) in the Gulf states and Malaysia.

S&P said the sukuk market was heading toward a correction in 2015 after Bank Negara switched to other liquidity management instruments. “We have therefore revised our forecast for total sukuk issuance in 2015 to US$50bil-US$60bil from US$100bil-US$115bil, assuming no issuance from Bank Negara in 2015.

“Excluding this effect, the market performed relatively well despite the decline in oil prices. The list of potential sukuk issuers continues to increase, but the timing of their issuance is uncertain,” it said.


   

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