KUALA LUMPUR: Worldwide sales of Islamic bonds will drop in 2017 after rebounding from a five-year low, as higher US interest rates and weaker growth prospects in key markets crimp offerings, according to the debt’s top arranger.
Issuance will fall to between US$35bil and US$40bil, with the bulk being used to refinance debt and fund infrastructure projects, according to CIMB Islamic Bank Bhd, which topped Bloomberg’s sukuk league table in eight of the past 10 years.
RHB Investment Bank Bhd, ranked fourth in 2016, predicts sales to be similar to last year, when they rose 24% to US$44.1bil.
“Sukuk sales will register flat growth in 2017,” said Angus Salim Amran, head of financial markets at RHB Investment. “US interest-rate hikes and higher inflation against a backdrop of challenging global economic conditions foster an uncertain growth trajectory for sales.”
The outlook for global sukuk has dimmed amid weak growth prospects in Malaysia and the Middle East, the two main hubs that together account for more than two-thirds of the US$328bil sukuk outstanding worldwide. At the same time, borrowing costs are rising as the Federal Reserve increased interest rates in December and signalled more tightening for this year.
The JPMorgan MECI Sukuk Current Yield has climbed 27 basis points to 4.19% since reaching a record low in August. Malaysia’s 10-year government sukuk yield has jumped 82 basis points to 4.38% after touching a three-year low in September.
Fed officials focused on the impact of potential fiscal stimulus during their December policy meeting, with many starting to worry that the central bank might eventually be forced to quicken the pace of rate increases to head off higher inflation.
“Market volatility, the Fed’s rate policy and deferred capital expenditure/expansion plans” are among factors that would weigh on sales, said Mohamad Safri Shahul Hamid, CIMB Islamic’s deputy chief executive officer.
CIMB is expecting issuance from “new jurisdictions,” but the market’s “heavy reliance on Malaysia and the Middle East will persist in the near-to-medium term,” he said.
Malaysia’s local-currency Islamic bond market would remain “buoyant,” Safri said. He expects sukuk sales to make up for 70% to 75% of an estimated total primary debt issuance of up to RM100bil (US$22bil) in 2017.
The Islamic debt industry has seen interest from new markets wane after Hong Kong, Luxembourg and the UK all sold their debut bonds in 2014. Morocco announced plans for its first syariah-compliant bond sale in November 2015 after passing a sukuk law.
Authorities in Kenya, which in January last year stated their intent to sell sukuk to finance infrastructure projects, said recently that it may be difficult to issue in 2017.
“Global sales in 2017 will likely be similar” to last year, driven by infrastructure spending, said Mohd Effendi Abdullah, the head of Islamic markets at AmInvestment Bank Bhd. — Bloomberg