Sukuk issuance to grow in 2019 helped by Malaysian issues

Total issuance for the whole year could surpass last year’s RM72.7b figure according to MARC


THE sukuk market is set to sustain its growth trajectory in 2019 based on sukuk issued in the first half of 2019 (1H19) and in the pipeline.

The International Islamic Financial Market (IIFM) estimates global sukuk issuance this year to be in the range of US$130 billion (RM544 billion) to US$135 billion due to strong domestic issuance in Malaysia, Indonesia and Gulf Cooperation Countries (GCC) in particular.

GCC compromises Saudi Arabia, Kuwait, the United Arab Emirates (UAE), Qatar, Bahrain and Oman.

Global sukuk market grew by 5.5% year-on-year (YoY) to US$123 billion in 2018.

“Global sukuk issuance is set to grow especially of short-term issuance particularly from Malaysia — where there is an increase of short-term sukuk issuance as per the strategic decision of the country,” Ijlal Ahmed Alvi (picture), CEO of IIFM noted in an email recently.

There’s no let up in Malaysia’s appetite for sukuk issuance. Corporate sukuk issuance surged to RM65.2 billion in January to July amid a large issuance from Urusharta Jamaah Sdn Bhd worth RM27.6 billion in May.

This single issue by the government- owned special purpose vehicle made Bank Islam Bhd the No 1 in the ranking advisor table in 1H19.

Some RM20 billion of the money was used to buy over the troubled assets from Lembaga Tabung Haji by the government.

Given the higher-than-expected issuances in 1H19, total issuance for the whole year could surpass last year’s RM72.7 billion figure according to Malaysian Rating Corp Bhd (MARC).

“The downside risk to this would be the prospects of slower economic growth in 2019 and 2020; concerns over the ongoing global trade tensions; lower issuance from quasi-government entities as the government may propose a limit on quasi-government issuance to reduce its debt obligations,” Nor Zahidi Alias, associate director of the economic research division at MARC noted in an email.

The downward trend in global interest rates could also fuel new issues at lower pricing.

“In case of domestic sukuk issuance, the profit rate on sukuk issues is linked to reference rate policy of the jurisdiction and the profit rate varies, however, at the moment the trend of rate tightening from leading global economies seems to be over and it is towards lower rate hence sukuk pricing is likely to follow this trend,” Ijlal Ahmed said.

Since sukuk requires underlying assets, the quality of asset and the credit rating of issuer play a role in pricing, Ijlal Ahmed added.

International sukuk issues fell by 14% YoY in 2018 to US$32.98 billion while domestic sukuk issuance rose by 14% YoY to US$90.16 billion.

The main driver of international sukuk were sovereign issuers, while issuance from corporate and financial institutions improved in 2018 (though below true potential ex-Malaysia) and the quasi sovereign issuers were less active compared to 2017 Ijlal Ahmed said.

While sukuk issues remain primarily driven by Malaysia, Ijlal Ahmed believes issuance from jurisdictions like Indonesia and GCC (particularly Saudi Arabia and the UAE), Turkey and Pakistan are gradually increasing.

How have macro issues like the US-China trade tension, Brexit and market volatility affected fund flows into the sukuk market last year and this year?

“Although macro issues may impact flows, considering strong demand for sukuk and it is mostly domestically driven, we do not see a major affect due to issues highlighted,” Ijlal Ahmed said.

Global sukuk issuance last year rose to US$123.2 billion (RM512.12 billion), up 5.5% from primary market sukuk issuance of US$116.7 billion in 2017, said IIFM’s annual sukuk report 2019 released recently.

The steady issuance volume last year was due to sovereign sukuk issuance from Asia, GCC countries, Africa and other jurisdictions.

Sukuk issuance jumped by 45.3% YoY to US$97.9 billion in 2017 on jumbo issuance from certain GCC countries.

IIFM reported that in 2018, there was a growing interest in — green sukuk, sukuk with socially responsible investing values and sukuk issuance via blockchain technology.

The sizeable portion of new issues in 2019 could also come from global sukuk that are set to mature this year and next, the IIFM noted.

Global sukuk with the issue size of US$100 million or above and a tenure of more than a year, which are set to mature in 2019 and 2020 — stand at around US$73.34 billion, the IIFM report noted.

“Considering investors’ appetite and sukuk issuance in the pipeline, these maturing sukuk will likely be refinanced with new issuance, which has been the case in recent years,” the report said.