Malaysia to continue leading global sukuk market growth
KUCHING: With strong performance seen in 2012 and an optimistic outlook on the horizon for 2013, Malaysia will continue to dominate the global sukuk market with various issuances to mainly fund infrastructure development within the country.
Besides the PLUS issuance, RAM Ratings Services Bhd (RAM) in a special report on the subject said regular issues were made by the Malaysian government and central bank, amounting to a total of US$63 billion.
“Overall, Malaysia issued US$97.1 billion of sukuk last year, accounting for 69.7 per cent of the total,” it said. “As with the global scene, Malaysian sukuk issuances have hit a record high.
“The market continues to be boosted by encouraging demands for ringgit-denominated sukuk and a comprehensive regulatory framework. In addition, continuous development plans especially in the infrastructure sector ensured the growth of the sukuk market.”
RAM added that infrastructure projects would also be boosted by the National Economic Transformation Programme which charts the ongoing development plans over the next decade.
This factor also underscored the importance of Malaysia in the global sukuk market, with Malaysia continuing to dominate as the destination choice for sukuk issuances.
“This is reflected in Malaysia’s continued dominance over the years where the country has been the largest issuer for several years, although notable players such as Saudi Arabia and the UAE are expected to increase their market shares in 2013.”
On a worldwide basis, the sukuk market scaled new heights in terms of issuance in 2012, continuing the growth trajectory set the year before. As a result, sukuk issuance leapt 50.3 per cent to US$139.2 billion compared with US$92.7 billion achieved in 2011.
Sovereign sukuk also maintained its foothold in the global arena last year, with Malaysia, Qatar and Turkey making significant contributions in terms of issue value and milestones, RAM added.
“Sukuk charted another stellar year in 2012 in terms of issuance with an impressive haul of US$139.3 billion – an increase of 50.3 per cent from the previous year.
“The picture looks set on remaining healthy going forward, with global demand for sukuk projected to rise to US$900 billion by 2017 from the estimated US$300 billion in 2013.”
A strong issuance pipeline was thus expected, with an additional US$27 billion already announced for 2013. Saudi Arabia was expect- ed to emerge as a key player in the sukuk market, with a projected 20 per cent of total issuance.
The rise of sovereign sukuk
A prominent theme in the sukuk arena that carried through from 2010 to 2012 was the increasingly diverse range of countries that has looked to sovereign issuance as a method of financing, highlighted RAM, adding that sovereign sukuk were starting to find their feet as a valuable and viable tool to raise public funding.
“Since the inception of the sukuk market, the value of sovereign sukuk issued cumulatively as at end-December 2012 stands at US$194 billion. Based on data from Islamic Finance Information Service, sovereign sukuk has been the main booster of the sukuk market, with a significant 145.1 per cent year on year (y-oy) increase (or US$66.9 billion) in 2011.
“In 2012, the amount of sovereign sukuk issued summed up to US$80.2 billion. Of those, Malaysia and Saudi Arabia were the frontrunners in the issuance of sovereign sukuk accounting for a respective 74 per cent and eight per cent.”
Meanwhile, record sovereign issuances from countries such as Indonesia and Qatar, and promising debutantes such as Saudi Arabia, Turkey, Kazakhstan and a growing number of African countries, were all contributing to a global sukuk market.
This is one of the leading drivers in the development of the Islamic finance industry, creating new opportunities and encouraging corporate sukuk to follow suit.
“Last year was marked by positive moves from the Middle East, including a substantial upswing in public spending on the back of lofty oil prices, coupled with more upbeat investor sentiment and increasing interest in more diverse funding sources,” RAM outlined.
“As investors recover from the debt-restructuring debacle, demand is once again rising for high-quality offerings; the region is experiencing a slew of sovereign fund-raising efforts to support economic growth.”
To note, Qatar launched its nine-year sovereign sukuk in July 2012 – a US$4 billion two-tranche Ijarah issue. The sukuk programme had attracted an exceptionally robust order book, which was six times oversubscribed, highlighting the strong global demand for Islamic sovereign papers.
Bahrain had also remained active in the sukuk market with a US$750 million sukuk in June, which had elicited US$1.8 billion of demand. The Qatari and Bahraini issues spiked up Gulf sovereign sukuk last year, aided by international enthusiasm for Islamic liquidity to fund public infrastructure.
In the last five years, however, RAM noted that Indonesia had been stepping up its sovereign-paper programme, with the introduction of new sukuk laws and more favourable legislation to encourage issuance.
The country recently announced a further 15 per cent increase in infrastructure investment for 2013, which would also be funded by sovereign debt.
“The substantial Indonesian requirements for public infrastructure and project finance should boost sovereign issuance and attract more interest over the next 2 years. The Indonesian government expects infrastructure spending to exceed US$72 billion over the next five years, and is keen to follow Malaysia and the Gulf region’s example on tapping Islamic liquidity to help finance this,” opined the ratings agency.
Potential sovereign sukuk boom in 2013
Following in the footsteps of these trailblazers are a multitude of new countries keen to tap the opportunities offered by Islamic investments.
“As mentioned earlier, both Kazakhstan and Turkey made significant contributions in the global sukuk market,” RAM highlighted. “Elsewhere, Africa is also in the picture, with the announced maiden US$200 million sovereign sukuk from Senegal and a potentially five to seven year Nigeria sovereign sukuk.
“Last May, Egypt announced that it was planning a US$ 2 billion sovereign sukuk. In the meantime, the long- awaited South African sovereign sukuk amounting to an estimated US$5 to US$7 billion is expected to be issued to both domestic and international investors, particularly in the Middle East.”
Looking down the road, this year was expected to be another record year, with new countries finalising legislation on sukuk issuance, RAM noted.
“The increase in global sukuk issuance is forecasted mainly driven by further regulatory and legislative developments. Sovereign sukuk is also trending upwards amid government initiatives to spur domestic infrastructure projects.
“The continuous development of legislation from various countries (such as Oman) will promote more sukuk issuance, thus boosting positive sentiments and the sukuk market as a whole.”