Sukuk issuances normalise from record high, says Fitch Ratings

By TMR / Pic AFP

Sukuk issuance in the 10 largest markets fell last year following record issuance in 2017, Fitch Ratings Inc said.

The rating agency said it did not believe the drop reflected long-term trends, but it showed how issuance volumes can be influenced by the activity of individual borrowers, notably oil-exporting sovereigns.

Sukuk issuance with a maturity of more than 18 months from the Gulf Cooperation Council (GCC) region, Malaysia, Indonesia, Turkey and Pakistan totalled US$39.8 billion in 2018 — a decline of nearly one-third from the previous year, but in line with the 2012-2016 average.

Last year’s 30% decline in conventional bond issuance suggested that lower sukuk issuance was principally a function of higher oil prices in the first nine months of 2018, which reduced immediate borrowing needs among some sovereigns and improved liquidity in their banking systems, the agency said.

It noted that US monetary tightening has also raised borrowing costs, with sukuk’s share of total issuance broadly unchanged at 27%.

It added that the debt capital markets in the GCC were relatively immature, and individual sovereign funding decisions could profoundly affect total supply.

“We believe that sukuk issuance is more likely to stabilise or slightly recover in 2019 than fall further. We expect debt issuance to constitute a larger share of GCC sovereigns’ funding, given reduced drawdowns from government reserves.

“We forecast oil prices to average US$65 (RM266.50)/barrel (Brent), which may support both conventional and sukuk issuance. Several exporters will need to fund budget deficits, but the price may be sufficient to support investor confidence in these countries’ economic performance,” according to the statement released by Fitch Ratings’ senior director for global head of Islamic finance Bashar Al Natoor.

The statement said long-standing constraints on the expansion of Islamic finance remain, notably the lack of standardisation of product structure, documentation, financial reporting and Shariah codification.

It noted that recent initiatives to boost standardisation included the agreement between the Malaysia-based Islamic Financial Services Board, and the Accounting and Auditing Organisation for Islamic Financial Institutions in Bahrain, to cooperate on prudential, Shariah, accounting and governance standards.

But gaps remain, including in relation to legal documentation, and an absence of case law, the statement added. — TMR