Friday 29 Mar 2024
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KUALA LUMPUR (Dec 5): Malaysia saw long-term sovereign sukuk issuances decline by 19% to US$7.7 billion in the first eight months of this year, compared with US$9.5 billion a year ago, according to Moody’s Investors Service.

Despite Malaysia’s falling share of sovereign sukuk issuance, the international rating agency said it remains the largest Islamic issuer with an estimated 43% of total sovereign sukuk outstanding in 2016.

Indonesia is close on Malaysia's heels. Moody's said the republic's share in annual sukuk issuance has increased to 30% in 2016, from just under 10% in 2010, and it will likely grow with the government's efforts to develop the Islamic finance sector.

In a report titled “Sovereign sukuk issuance gains momentum, with new players entering the market” released today, Moody's said nevertheless, as other sovereigns' issuance increase and Malaysia's own borrowing needs narrow, the latter's share in global sovereign sukuk issuance is unlikely to return to the levels seen earlier this decade.
 
"In 2016, Malaysia's share fell to about 30% in 2016, from an average close to 50% between 2010 and 2015 (including government-related entities and multilateral developments banks). In particular, Malaysia's gradual fiscal consolidation will continue to drive lower needs for sukuk and conventional issuance," the report added.

The world’s first green sukuk was structured in Malaysia in July this year by Edra Power Holdings Sdn Bhd's Tadau Energy Sdn Bhd, for funding a large solar project in Kudat, Sabah, and was followed by another issuance in October.

Moody's believes the Malaysian precedent could encourage other issuers to enter the green sukuk market, including sovereigns and in particular the GCC governments, in their ambitions to diversify their economies away from the oil industry.

"At the same time, many supranational organisations in the Middle East and North Africa (MENA) region also explore ways of diversifying their investment portfolios into renewable energy sector, contributing to the growth prospects of the green sukuk market," Moody's added.

Though only a few countries like Malaysia and, increasingly, Indonesia use sukuk as a material component of their borrowing programmes, Moody's expects a larger number of countries to increase their reliance on Islamic instruments in order to diversify their longer-term financing mix.

"In particular, Gulf Cooperation Council (GCC) sovereigns are likely to refinance some of their maturing conventional bonds with sukuk instruments. Saudi Arabia’s position in the global sukuk landscape is expected to be fortified, after it tapped the market for the first time in April this year and launched its unlimited riyal-denominated sukuk programme in July," Moody's added.

Meanwhile, Moody's estimates that total sukuk issuance will reach around US$95 billion by the end of this year, after more than US$85 billion in 2016, including more than US$50 billion of sukuk issuance by sovereigns.

"Sovereigns have underpinned a recovery in the global sukuk market this year, with their issuance increasing by 50% in the first eight months of 2017," said Moody's vice-president and senior credit officer Christian de Guzman, who is one of the report's authors.

"We expect sovereign sukuk issuance volumes to continue to grow in 2018, as governments look to diversify their financing mix and satisfy the liquidity needs of Islamic retail banks," de Guzman added.

A number of factors will support sovereign sukuk issuance, including high borrowing needs for GCC sovereigns, which Moody's expects to reach around US$148 billion in 2018.

GCC countries drove the market's growth in 2017, with Saudi Arabia (A1 stable) raising the lion's share of sukuk during the year to a total of US$17 billion, or 40% of global long-term sovereign sukuk issued in the first eight months of the year.

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