Sukuk maintains positive outlook; undeterred by continued slowdown-Report

Manama - MENA Herald: Thomson Reuters, the world's leading provider of intelligent information for businesses and professionals, released today the findings of its fifth consecutive Sukuk Perceptions and Forecast study.
Despite a bleak 2015, market players remained hopeful for robust year ahead with expectations of oil-exporting countries in core markets to turn to sukuk as a primary debt management tool. Core markets have adapted to ongoing low oil prices, while apprehension over expected global interest hikes has begun to subside. However, the decision from Bank Negara Malaysia (BNM) to cut short-term sukuk issuances continues to dampen sukuk supply. Moreover, the shift in sovereign issuers’ preference from sukuk to conventional bonds has contributed further to the decline in supply. Total sukuk issued in the first 9 months of 2016 dropped further by 18.46% to US$ 39.8 billion from US$ 48.8 billion for the same period in 2015.
Nadim Najjar, Managing Director, Middle East & North Africa, Thomson Reuters, said: “The global sukuk market continued to drop in terms of volume and value during 2016, albeit at a much slower pace than in 2015. Last year, expectations were set on governments of oil-exporting countries, mainly in the GCC, increasing their sukuk issuances to cover their widening budget deficits that resulted from persistently low oil prices. These expectations were curbed. Although these governments, mainly GCC, increased their overall debt issuance, these were mostly geared towards conventional bonds.”
He continued: “This year, the sukuk pipeline is valued at US$ 22 billion, compared to a stronger pipeline of US$ 32 billion last year. However, there are signs indicating the expansion of the sukuk market, especially in Africa. In 2016, we have seen the return of Ivory Coast with their second issuance, after launching their debut sukuk in 2015. The Togolese government issued their debut sukuk earlier this year. Other African countries, including Nigeria and Kenya, have issued new sukuk regulations as a precursor to launching their first sovereign sukuk.”
The report found that both potential demand and supply of sukuk are expected to grow, with demand substantially exceeding supply until 2021. The gap between supply and demand is forecasted to be US$ 143.1 billion in 2017, increasing to US$ 178.4 billion in 2018 and reaching US$ 271.3 billion in 2021. The supply of sukuk is projected to recover in 2017 with 10% growth, based on expectations that demand for bonds issued by governments of oil-exporting countries begins to subside once foreign investors find similar returns in their home countries with the reversal of negative yields. These GCC governments are expected to return to issuing sukuk to fund their deficits and capitalize on increasing demand from Islamic investors. This growth in supply is expected to remain steady over the following 4 years (2018 to 2021).
In addition, the report also highlights shifts in sukuk market attributes. International sukuk gained 10% market share of new issuances from issuances denominated in domestic currencies. This has resulted in the US Dollar overtaking the Malaysian Ringgit as the most issued currency, accounting for 45% of issuances. The sukuk market has also seen Quasi-sovereign issuances become more prevalent this year, with its share increasing by 7% as the shares of both sovereign and corporate issuances declined.
The findings in this report are based on a survey of sukuk lead arrangers, investors, and other key market players including regulators, legal advisors, and rating agencies predominantly based in Islamic markets in MENA and Southeast Asia. The survey was conducted in August and September 2016. The primary empirical data gathered from the survey was subsequently developed to provide forward-looking analytics on the appetites and preferences of sukuk investors for 2017 and beyond. In this year’s report, we have also interviewed key market players to give their opinion on issues and trends in the sukuk market, such as the decline in sukuk supply and liquidity, and the shift of GCC sovereign issuers to conventional bonds.