Global sukuk issuance set to increase over $140bn in 2021: S&P

S&P Global Ratings said that it expects global sukuk issuance will rise to about US$140bn– US$155bn this year from US$139.8bn in 2020, thanks to a recovery in issuance in Malaysia, Indonesia, and the GCC countries.

The ratings agency said the market conditions should remain buoyant throughout 2021, with record-low interest rates and abundant liquidity.

‘We also expect GDP growth in the core Islamic finance countries – the GCC countries, Malaysia, Indonesia, and Turkey – to recover from a sharp recession in 2020. We also assume that the price of oil will stabilise at about US$50 per barrel in 2021. Together, these factors underpin a stronger performance by the global sukuk market in 2021 than in 2020,’ S&P said in a report.

However, downside risks for the core Islamic finance countries remain significant.

The main risk is that further waves of COVID-19 and the requisite containment measures may harm countries’ fragile economic recovery, the report said.

‘Over the next 12-18 months, we could also see progress on a unified global legal and regulatory framework for Islamic finance, and may see some sukuk issuances that aim to tackle the social problems arising from the pandemic or support the energy transition,’ the ratings agency said.

S&P forecasts that the number of defaults or restructurings among sukuk issuers with low credit quality will likely increase in 2021 as regulatory forbearance measures come to an end. ‘This will test the robustness of the legal documents used for sukuk issuances.’

‘However, if investors are able to get clarity on their financial recourse mechanisms because of these events, this will probably outweigh the negative impact on market sentiment.’

While governments’ financing needs are likely to decline in 2021 compared with 2020 as the oil price stabilises and their economies grow, S&P believes that part of these needs will be satisfied with sukuk issuance.

In 2020, some governments in the core Islamic finance countries issued conventional bonds rather than sukuk, since they are easier to structure, and reportedly allow them to tap a wider investor base, S&P said.

‘Overall, we expect 2021 to be a relatively good year for the sukuk market. Standardisation might move forward and enhance the attractiveness of the market to new issuers. Green and social sukuk are being explored slowly and will likely contribute modestly to the market over the next 12 months,’ the ratings agency added.