S&P Global Ratings forecasts an increase in global sukuk issuance this year, as issuers in core Islamic finance countries return to the market amid exceptionally low interest rates and ample liquidity provided by central banks.
“Market conditions should remain buoyant throughout 2021, with record-low interest rates and abundant liquidity,” the agency said.
Total sukuk issuance is expected to be about $140 billion–$155 billion in 2021, thanks to a recovery in issuance in Malaysia, Indonesia, and the Gulf Cooperation Council (GCC) countries. $139.6 billion of sukuk were issued in 2020 compared to US$167.3 billion in 2019.
“We also expect GDP growth in the core Islamic finance countries … to recover from a sharp recession in 2020 [and] we assume that the price of oil will stabilize at about $50 per barrel in 2021. Together, these factors underpin a stronger performance by the global sukuk market in 2021” Mohamed Damak, the global head of Islamic finance at S&P Global, said.
The ratings agency expects both sovereign and corporate borrowers to rush to sell Sharia-compliant bonds.
“We believe that some sovereigns in the core Islamic finance countries will tap the sukuk market more aggressively in 2021. We also foresee an increase in issuance by corporates.”
Furthermore, $65bn of sukuk will mature this year, with part of that sum likely to be refinanced, which will help to drive the volume of issuances, Damak added.
“Overall, we expect 2021 to be a relatively good year for the sukuk market. Standardization might move forward and enhance the attractiveness of the market to new issuers. Green and social sukuk are being explored slowly and will likely contribute modestly to the market over the next 12 months. Finally, while more restructurings or defaults could occur in 2021, if investors are able to gain clarity on their financial recourse mechanisms, this will probably outweigh the negative impact on market sentiment” the agency said.
Fitch Ratings also expects global sukuk supply to accelerate in 2021 as issuers seek to refinance maturing debt and fund large budget needs.
“The easing of GCC investment restrictions following the normalization of relations between Qatar and its neighbors will also contribute to higher volumes.”
Sovereigns in key Islamic finance jurisdictions are expected to remain major contributors to overall sukuk volumes. Issuance from first-time sovereign issuers, financial institutions and corporates are set to increase as they face challenging conditions and take advantage of the current lower cost of funding, according to Fitch.
The Islamic Finance Institution also expects market momentum to continue into 2021, as issuers lock in long-term funding at historically low rates.
First Abu Dhabi Bank (FAB) on Jan.11 announced it has issued the first sukuk globally in 2021. The UAE's largest bank said it has issued the lowest-ever yield on any five-year MENA bank US dollar issuance with its $500 million sukuk. Issued through FAB Sukuk Company Limited, the offering attracted a total order book of about $1.5 billion which represents a three times over-subscription rate.