Low interest rates set to drive global sukuk issuances to more than $150bn this year
Global sukuk issuance is set to bounce back to more than $150 billion this year as borrowers rush to sell Sharia-compliant bonds amid low interest rates, according to Mohamed Damak, the global head of Islamic finance at S&P Global.
The economic recovery in Malaysia, Indonesia and GCC countries – the three core Islamic finance markets – and the ample liquidity provided by central banks around the world will drive growth in the market, he said in a report.
Total issuance is expected to be between $ 140bn and $151bn this year.
At the lower end of estimate, the size of the market this year would be just above the $139.6bn recorded last year but lower than the $167bn recorded in 2019.
“Market conditions should remain buoyant throughout 2021, with record-low interest rates and abundant liquidity,” said Mr Damak.
“We also expect [gross domestic product growth] in the core Islamic finance countries ... to recover from a sharp recession in 2020 [and] we assume that the price of oil will stabilise at about $50 per barrel in 2021.
“Together, these factors underpin a stronger performance by the global sukuk market in 2021.”
The ratings agency expects sukuk worth $65bn to mature this year, with part of that sum likely to be refinanced, which will help to drive the volume of issuances.
While some sovereigns in core Islamic finance countries will tap the sukuk market more aggressively this year, the market will also benefit from the increased sale of corporate Islamic bonds.
“Their activity was muted in 2020 as they held on to cash and deferred capital expenditure because of the pandemic,” said Mr Damak.
“They [corporate sector issuers] are likely to execute some of this capex in 2021, thereby necessitating access to capital markets.”
First Abu Dhabi Bank, the UAE’s biggest bank by assets, said on Monday that it raised $500 million through a five- year dollar- denominated sukuk with the lowest yield by a Mena bank. Pricing on the first dollar sukuk deal of the year represented a “negative new issue premium” when compared to FAB’s sukuk that matures in January 2025, the lender said.
Central banks around the world unveiled monetary stimulus measures last year to support financial markets and soften the blow of the pandemic on their economies. Interest rates have been set near or below zero in many countries.
Lower interest rates are expected to remain in place this year and beyond as the global economy continues to recover. The International Monetary Fund expects global GDP to expand by 5.2 per cent this year after contracting by 4.4 per cent last year.
“We expect central banks will keep interest rates exceptionally low and continue to offer liquidity support as necessary,” said Mr Damak.
S&P’s prediction of a sukuk market revival is based on the assumption that the spread of Covid-19 will be curbed gradually in the core Islamic finance markets from the second quarter of this year, through a combination of vaccines, medical treatments and testing.
However, downside risks remain significant, including the ability of the countries to curb the pandemic even with the availability of vaccines.
“The main risk is that further waves of Covid-19 and the requisite containment measures may harm the countries’ fragile economic recovery,” said Mr Damak.
“This could affect the countries directly or indirectly through lower commodity prices, exports and capital flows.”
S&P predicts that the number of defaults or restructurings among sukuk issuers with low credit quality will increase this year as “regulatory forbearance measures come to an end”.
“This will test the robustness of the legal documents used for sukuk issuances,” the credit rating agency said.
Mr Damak expects a unified global legal and regulatory framework for Islamic finance market to emerge over the next 12 to 18 months.
“We believe that such a framework could help resolve the lack of standardisation and harmonisation that the Islamic finance industry has faced for decades.”