Fitch sees significant rise in global Sukuk supply beyond 2021

Growth to be driven by strong investor appetite, issuers’ refinancing, funding diversification needs

FITCH RATINGS, THE GLOBAL rating agency, has projected that Sukuk supply is expected to rise significantly in the second half of 2021 after the instrument showed strong growth during the second quarter of 2021. It says the expected growth will be supported by a strong investor appetite and issuers’ refinancing and funding diversification needs.

The Sukuk market experienced strong market activity during the second three months in 2021 after a slower first quarter, driven by big-ticket issuance from the Saudi Arabian Oil Company (the largest corporate Sukuk issued to date) and the Indonesian, Turkish and Omani sovereigns. A major driver of the growth came from the issuers who were aiming to diversify their fundings and as well take advantage of the low interest-rate environment amid continued fiscal deficits and still-challenging economic conditions.

Similarly, investor demand remains intact due to new Sukuk supply scarcity and the global hunt for yield. However, Fitch says seasonal patterns will likely affect the quarterly Sukuk issuance which, following the summer break, is anticipated to pick up in the remainder of 2021 and beyond.

However, it is worth mentioning that while the volume of outstanding Fitch-rated Sukuk reached $131 billion, with 80 percent of the issues being investment-grade, defaulted Sukuk volumes remain small at 0.27 percent of gross Sukuk issued to date and include the 2021 Sukuk default by PT Garuda Indonesia, unrated by Fitch.

“Legal precedents for effective enforcement are lacking in many

Sukuk-issuing jurisdictions. More Sukuk defaults could emerge due to the economic volatility caused by the coronavirus pandemic and once governments withdraw their financial support. A number of recent international Sukuk issuances contained new clauses and revised terms in the documents to comply with the sharia standards of the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI),” Fitch said.

It also said the changes aim to address the globally sizeable UAEbased Sukuk investors, issuers, and arrangers that are subject to AAOIFI compliance rules, and further emphasized that these changes have credit implications that could affect issuers’ liquidity, credit profile, and ratings. Fitch said further changes may be made in the future to comply with AAOIFI standards, which Fitch says it will assess.