S&P sees worldwide sukuk issuance setting to stall in 2015

  • Business Premium
  • Tuesday, 07 Jul 2015

Last year Bank Negara issued about US$45bil of sukuk out of a total issuance of US$116.4bil worldwide.

KUALA LUMPUR: Standard & Poor’s Ratings Services foresees the global sukuk market heading toward a correction in 2015 after Bank Negara Malaysia (BNM) -- one of the largest issuers of sukuk worldwide -- stopped issuing earlier this year.

In its report issued on Tuesday, the international ratings agency said BNM’s move leaves the door open to issuers such as the International Islamic Liquidity Management Corp (IILM) and the Islamic Development Bank (IDB) 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, BNM’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, BNM alone issued about US$45bil (RM171.6bil) of sukuk out of a total issuance of US$116.4bil (RM444bil).

“We understand part of the reason behind BNM’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, BNM decided to switch to other instruments restricted to banks,” it said. 

Excluding the BNM 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 [GCC] countries and Malaysia) was limited in the first half of 2015. 

S&P said while it expects this trend to continue in the second half of 2015, the effect of lower oil prices on sukuk issuance in 2016 remains 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 also 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 is heading toward a correction in 2015 after BNM stopped issuing and switched to other liquidity management instruments.

“We have therefore revised our forecast for total sukuk issuance in 2015 to about US$50bil to US$60bil from US$100bil to US$115bil, assuming no issuance from BNM 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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