Moody’s: Sukuk market to recover on moderating oil prices, higher deficit financing needs


The global sukuk issuance is expected to recover to reach US$87 billion (RM354.96 billion) this year, on moderating oil prices and higher deficit refinancing needs by major sovereign issuers.

Moody’s Investors Service Inc noted that higher deficit financing would be needed in major sovereign sukuk issuers in 2019 and 2020, with Malaysia being the most exposed if compared to other sovereigns.

The rating agency predicts total sovereign and supranational sukuk issuance, including short-term securities, to rise to US$100 billion in 2020, surpassing the all-time high of US$93 billion reached in 2012. Sukuk issuance stood at US$78 billion last year.

“The recovery in issuance stems from higher deficit financing needs amid moderate oil prices, in particular for sovereign issuers in the Gulf Cooperation Council (GCC), higher sukuk refinancing needs especially in Malaysia, and a gradual increase in the share of sukuk in major issuers’ fiscal deficit financing,” Moody’s stated in a report, yesterday.

Malaysia, rated A3 stable, retains the largest outstanding long-term sovereign sukuk at US$84 billion followed by Indonesia and Saudi Arabia at around US$40 billion each.

Sukuk also financed close to 80% of Malaysia’s fiscal deficit financing needs from 2015 to 2018 — significantly higher when compared to Qatar and Indonesia who only financed a third of their respective fiscal deficits via sukuk.

“We expect the three largest issuers — Malaysia, Saudi Arabia and Indonesia — to gradually increase their share of sukuk in fiscal deficit financing, further supporting the market’s growth prospects,” Moody’s said.

“In the medium term, gross issuance will rise further, particularly when GCC sukuk instruments issued after 2016 begin to mature in 2022 and beyond, and are refinanced by issuing new sukuk instruments.”

In 2020, the rating agency said issuance will be supported by scheduled sukuk repayments which are expected to be refinanced in the domestic sukuk market with Malaysia leading the way.

“We estimate that scheduled repayments of Malaysia’s Government Investment Issues (the main vehicle for the government’s sukuk borrowing) will rise from around US$6.6 billion equivalent in 2018 to US$8.9 billion in 2019 and further to US$15.8 billion in 2020,” it said.

Meanwhile, GCC’s refinancing of sukuk issued after 2016 will support issuance beyond 2020 as it is predicted to increase from an annual average of US$2.4 billion in 2018 to 2021 to US$12 billion in 2022 to 2024. This will mostly be driven by the refinancing of Saudi Arabia’s domestic sukuk issuance.

Moody’s said the upside risk to its forecast is crude oil prices stabilising around US$60 to US$65 per barrel which is lower than its assumption of US$75 per barrel in 2019.

“Lower oil prices would widen the fiscal deficits for GCC governments, particularly for Saudi Arabia and Qatar, increasing their need to raise financing, including in the form of sukuk.”

The rating agency added that the use of Islamic instruments such as sukuk will further support diversification and stability in sovereigns’ future financing sources.