Bonds, sukuk at forefront in sovereign fundraising: RAM
Covid-19 provides opportunity for countries to raise money to finance aid packages – and for corporates to lock in attractive rates
PETALING JAYA: In the wake of global equity market meltdown driven by the uncertainties from Covid-19 pandemic, the debt and sukuk markets will serve as a bulwark to shore up a country’s financial standing, according to RAM Ratings.
In a note, the rating agency said the pandemic presented an opportunity for sovereigns to raise funds to finance aid packages, and for corporates to lock in more attractive funding rates while taking stock of their financing maturity profiles.
“Undoubtedly markets have been in turmoil and this will likely pose uncertainties with regard to future fundraising activity. With governments worldwide still weighing the economic implications of Covid-19, various forms of financial aid through economic stimulus packages and interest rate cuts have been announced.
“In such highly uncertain times, investors will seek safer havens by moving into bonds and sukuk, thereby benefiting some key economies in the sukuk market,” said RAM Ratings.
It concluded that governments which can effectively use monetary and fiscal tools to steer their economies in the right direction will stand a fighting chance of emerging less battered by Covid-19.
In 2019, the rating agency highlighted that the global sukuk market delivered a noteworthy performance with a gross issuance of US$130.2 billion (RM564 billion), a 41.6% jump from US$91.9 billion recorded for the previous year.
It stated that the top five countries by incremental value were Turkey (+320.4%), Qatar (+62.2%), Malaysia (+57.7%), Bahrain (+45.1%) and Indonesia (+26.2%).
“Even though issuance by noncore markets surged 138% to US$13.3 billion last year, the global sukuk market remained dominated by the Gulf Cooperation Council (GCC, 40%), Malaysia (34%) and Indonesia (15%),” reported RAM Ratings.
In terms of corporate sukuk issuance, the top position was retained by Malaysia with US$31.2 billion (or a 55.3% share), the UAE came next with US$9.8 billion (17.3%), followed by Saudi Arabia (US$9.1 billion or 16.2%) and Qatar (US$2.1 billion or 3.6%).
RAM Ratings noted that in terms of sovereigns, Saudi Arabia maintained its lead in the global sovereign sukuk market with a 28.9% (US$21.4 billion) share, followed by Indonesia (25.3% or US$18.7 billion), Malaysia (18.5% or US$13.7 billion) and Turkey (US$7 billion or 9.5%).
Overall, RAM Rating’s sukuk snapshot report indicated that Malaysia retained its lead with a 34.5% share of the global sukuk market, followed by Saudi Arabia (23.4%), Indonesia (15.0%), the UAE (7.5%) and Turkey (6.8%).
As at end-2019, it said the value of outstanding global sukuk had spiked up to US$574.1 bil, from US$454.5 billion at end-2018, a positive indication of sukuk’s relevance as an alternative form of financing in the mainstream global financial sector.
Looking ahead, according to a statement by Moody’s Investor Services, Saudi Arabia is expected to continue to hold its leading position as the world’s largest Islamic banking market, while Malaysia will see a rapid expansion of the sector this year.
This is despite the disruption posed by the Covid-19 pandemic.
“We expect sukuk issuance to remain stable at around US$180 billion this year, and the takaful insurance market will see steady growth as insurance premiums pick up in newly penetrated markets,“said its Moody’s VP-senior credit officer Nitish Bhojnagarwala in a report.
“However, downside risks are rising because of the coronavirus outbreak, as prolonged market disruption could dissuade issuers from coming to market.”
Moody’s noted that mergers between Islamic and conventional banks in the GCC region will drive one-off increases in assets this year, as they did in 2019. There will also be continued focus on the sukuk industry and increased issuance by the governments of the core Islamic finance markets.
“The deficit financing needs of some GCC sovereigns, amid weaker oil prices and higher sukuk refinancing, will also provide support,” said the report.