KUALA LUMPUR (July 26): Total new sukuk issuance (with maturity of more than 18 months) in key markets rose 11.2% to US$21.74 billion (RM88.44 billion) in the first half of 2016 (1H16), compared with US$19.54 billion in 1H15, said Fitch Ratings.
In a statement today, the international rating agency said the 11% increase in sukuk issuance from key markets in 1H16, underlines the agency’s expectation for gradually increasing issuance over the long-term, as more countries create supportive legal frameworks.
“Sukuk as a proportion of total issuance in the Gulf Cooperation Council (GCC), Malaysia, Indonesia, Turkey and Pakistan were also slightly ahead of the same period a year ago, but could not maintain the first quarter's very strong market share, due to the return of sovereign issuance of conventional bonds by GCC members in recent months,” said Fitch.
It added that the issuance was evenly spread across the first half of the year, with US$11.07 billion in the first quarter of the year and US$10.67 billion in the second quarter of 2016..
“We only look at longer-term issuance, because frequently rolled-over short-term debt can distort underlying trend,” said Fitch.
Sukuk represented 30% of total issuance in these countries in the first half, up from 28% in 1H15.
“The proportion would have been even higher, but for the return of Abu Dhabi and Qatar to the sovereign bond market with issues of US$5 billion and US$9 billion, respectively. Both sovereigns probably opted for bond financing to help attract international investors,” said Fitch.
Kuwait and Saudi Arabia are among other sovereigns that could come to the market, and which are considering capital market funding, says Fitch.
“The decision whether to issue bonds or sukuk, or a mix, depends on factors, including the target investor and funding base (international or regional and local).
“[It also depends on] the existence of a sukuk structure and Islamic finance strategy, and the needs and size of the Islamic finance industry, because Islamic banks are not allowed to invest in traditional bonds,” says Fitch.
The agency said investor appetite for the countries included in its analysis moderately improved earlier this year, due to a hunt for yield, in light of low rates in mature markets and by stabilisation of commodity prices.
“The UK's vote to leave the European Union has also reinforced the pressure on interest rates. These factors should help issuance volumes.
“Sukuk issuance should be supported in the medium to long term by the recent introduction and revamping of sukuk laws in some countries, the growing Islamic finance industry in these countries and increasing sovereign funding needs,” said Fitch.
The agency noted that greater harmonisation of sukuk standards, structures and legal frameworks resulting in improving transparency would also help improve issuers and investors' acceptance of such instruments.
“We continue to expect issuance to be relatively quiet in the third quarter, due to the combination of the summer and Eid breaks, with a pick-up towards year-end.
“Overall, our expectation is for 2016 sukuk issuance to at least match 2015 issuance of around US$32 billion,” said Fitch.