Global sukuk issuance likely to reach $ 70b this year

INCREASED SOVEREIGN ISSUANCE WILL DRIVE SUPPLY GROWTH IN ISLAMIC DEBT

Global sukuk issuance, expected to exceed $ 64 billion last year, is likely to reach around $ 70 billion this year, largely driven by increased issuance from governments.

“We expect sovereigns to issue approximately $ 30 billion of sukuk in 2014, increasing the size of the sovereign market to around $ 115 billion by year- end 2014. We forecast this strong growth momentum to be sustained as both Islamic and non- Islamic governments increasingly tap or newly enter the market,” said Khalid Howladar, Moody’s Global Head for Islamic Finance.

The last three years have seen the global sukuk market double, with a compounded annual growth rate of 30 per cent for the previous 10 years. The stock of sukuk outstanding almost quadrupled during that period as annual issuance rose sharply from less than $ 32 billion in 2010 to a record $ 83 billion at year- end 2012. Worldwide offerings fell to $ 64 billion in 2013 due to heightened perceptions of credit risk in emerging markets caused by the announcement of the tapering policy of the US Federal Reserve.

The sovereign sukuk market has grown strongly over the last three years, with annual issuance rising sharply from less than $ 15 billion in 2010 to $ 33 billion and $ 23 billion in 2012 and 2013, respectively.

Sovereign sukuk outstanding now accounts for around 36 per cent of the $ 296 billion outstanding global sukuk market as of July 2014. Taking into account government- related entities — which often have quasi- sovereign credit risk — the combined total exceeds one half of total sukuk issuance.

Sovereign volumes have grown strongly over the past decade and now reach a cumulative issuance total of $ 438 billion as of July 2014. Many sovereign sukuk have matured and those sukuk outstanding amounted to $ 105 billion as of July 2014. Moody’s expect the outstanding volume to reach $ 115 billion by year- end 2014.

“The year 2014 has become a landmark year for sovereign sukuk, with the UK issuing its inaugural sukuk, and with Hong Kong and South Africa expecting to conclude sales in September 2014. All three are major non- Islamic countries, and the transactions indicate a significant change in the potential size, depth and liquidity of this market,” said Howladar.

Volumes of sovereign sukuk have increased significantly over the last three years as governments in Asia, the Gulf Cooperation Council ( GCC), Europe and now Africa seek to tap increased demand for Sharia- compliant financial assets and further support their domestic policy goals for Islamic finance.

Driving growth

“Malaysia and more recently Indonesia have been driving the growth in sovereign sukuk with sales in their domestic markets,” notes Christian De Guzman, a Moody’s Vice President and Senior Analyst.

Together, the two countries account for around two thirds of total sovereign issuance as of July 2014. Moody’s expects many new Islamic and non-Islamic sovereign issuers to continue to enter the market while the investor acceptance of Islamic instruments is gaining momentum.

“Investors’ growing comfort with relatively complex Islamic instruments, the increasing financing needs and leverage appetites of some Muslim countries, as well as a desire for stronger investment links with the faster growing economies in the Gulf and Asia are driving this growth,” said Howladar.