KUALA LUMPUR (Sept 13): Global sukuk issuance is expected to fall to US$160 billion to US$170 billion this year, down from US$181 billion in 2021 and a record US$205 billion in 2020, according to Moody’s Investors Service.

Issuance fell 10% to US$92 billion in the first six months of 2022, from US$102 billion a year ago.

In a report, Moody’s said global sukuk issuance is expected to decline further in 2022, as major sukuk-issuing sovereigns' improved fiscal positions and higher interest rates pressure issuance activity.

"We expect gross sukuk issuance of US$70 (billion)-80 billion in the second half of the year. While issuance in Southeast Asia is likely to improve, we do not expect the Gulf Cooperation Council (GCC)'s strong performance in the first half of the year to continue into the second half," it added.

Moody's said higher interest rates will maintain pressure on issuance activity, particularly by corporates and financial institutions, which are more sensitive to changes in interest rates.

"Some issuers have deferred their access to the sukuk market, as a result of volatility in long-term interest rates in the first half of 2022. We expect this situation to persist into the second half of the year, as major central banks continue to raise rates to combat inflation," it said.

Nonetheless, Moody's said sukuk's appeal and acceptance as an investment tool is growing, as shown by high demand for recent issuances.

It noted that it has become normal for order books to exceed the offered amount by three or four times, particularly for creditworthy borrowers. Furthermore, demand for sukuk is increasingly coming from international actors in markets less exposed to Islamic finance.

Sukuk issuances from Southeast Asia declined by 25% year-on-year in the first half of 2022, mainly due to much lower sovereign issuance volumes.

Moody's said the region in the past has been the largest contributor to total sukuk issuances, but was outperformed by GCC countries during the period.

"We expect lower government expenditure due to a decline in pandemic-related spending in Malaysia and Indonesia to reduce fiscal deficits, leading to lower issuance activity. However, the drop in government issuances of more than 40% to US$14 billion in the first half of 2022, compared with US$23 billion a year earlier, surprised to the downside. Issuances by corporates and financial institutions were also down, though they showed more resilience compared with GCC peers."