Sukuk market to remain healthy

Malaysia and Saudi Arabia are expected to be the “twin engines” for the sukuk market growth.

KUALA LUMPUR: The global sukuk issuance is forecast to be around US$200bil (RM828.86bil) this year, supported by global appetite for green sukuk and new issuances from non-Muslim majority countries. The growth is expected to be led by Malaysia and Saudi Arabia.

Last year, global issuances rose 16.8% to US$152.6bil (RM631.76bil) compared with US$130.6bil (RM540.6bil) in 2019.

Moody’s Investors Service vice-president Nitish Bhojnagarwala said both Malaysia and Saudi Arabia are expected to be the “twin engines” for the sukuk market growth, while new issuances from South Africa, Hong Kong and Luxembourg would swing the conventional investors in the sukuk market as well.

“We are also getting questions from US-based investment funds, and they want to understand sukuk instruments.

“The investor base has widened and the dollar sukuk is helping in terms of global appeal of sukuk instruments. This is positive for the industry, ” he said at the Malaysian Rating Corp Bhd (MARC) Malaysian Bond and Sukuk Conference.

Malaysia became the first country to sell a dollar sukuk linked to sustainable activities.

In the first quarter (Q1) of financial year 2021 (FY21), Malaysia and Saudi Arabia held a market share of 44% and 28% respectively in the global sukuk market.

In the case of Malaysia, Nitish said sukuk issuance activity for this year would be driven by the continuation of accommodative fiscal policies by the government amid the ongoing Covid-19 pandemic.

“Our expectation of more favourable operating conditions on the back of a recovery from the worst of the pandemic last year should provide a boon to sukuk issuances by both corporate and financial institutions, ” he added.

A majority of the issuances are in local currency, with Malaysian corporates and financial institutions active in the short-term and long-term sukuk markets.

In Q1FY21, Nitish said global sukuk issuance activities fell by around 50% year-on-year to around US$46bil (RM190.64bil), with mainly sovereigns’ decreasing activity weighing on the overall level of issuances. “Decreasing issuance activity in the Gulf Cooperation Council (GCC), particularly Saudi Arabia as well as Indonesia, drove the overall decline in volumes, ” he added.

In the long run, Nitish noted that the growth trajectory for the sukuk market is expected to be from higher issuance activities from Turkey and Indonesia, which collectively hold a market share of 16% in the first quarter of this year.

“The slow pace in Islamic banking activities in Turkey and Indonesia is likely to gain momentum which would translate to increased activities in the sukuk market, ” he said.

Going forward, Nitish added that the environmental, social and governance (ESG) sukuk is also expected to be a driver for growth in the sukuk market in the long run.

“There is a broader appetite of ESG sukuk as there is a huge flow of capital moving into the ESG space.

“We also feel long-term growth trajectory for the sukuk market is likely to be from Indonesia and Turkey, which now collectively hold market share of 10% to 15% globally, ” he said.

According to Nitish, green sukuk accounted for about US$6bil (RM24.87bil) in 2020, which is roughly about 3% of the overall issuance in the global market.

Last month, Malaysia issued the world’s first sovereign sustainability sukuk which had received overwhelming response from global investors, being oversubscribed by 6.4 times.

Overall, Moody’s Investor Service senior vice president Christian de Guzman expects Malaysia to continue dominating the global sukuk market due to its well-developed infrastructure for Islamic finance, encompassing both the aspects of issuers and investors.

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MARC , Sukuk , market growth , Moody's


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