Sukuk issuance volume expected to grow in 2020

The lower rate environment should augurs well for sukuk especially from the issuers’ standpoint, says economist


MORE sukuk issuances can be expected this year as interest rates will likely remain low to reflect the accommodative stance of Bank Negara Malaysia (BNM).

Bank Islam Malaysia Bhd chief economist Dr Mohd Afzanizam Abdul Rashid said the lower rate environment should augurs well for sukuk especially from the issuers’ standpoint.

“The prevailing interest or financing rate level will allow companies with good credit to issue sukuk and be able to enjoy lower cost of funds as a result. At the same time, demand for long-term investors such as pension funds, insurance companies, banks and asset management firms is expected to be forthcoming, given their nature of liabilities which is typically long term,” he said.

He added that during periods of heightened economic uncertainty, investors normally flock to safe haven instruments such as sukuk in order to protect their investment principle and to enjoy capital gain since sukuk prices and interest-rate level are inversely related.

“For Malaysia, we expect a similar trend whereby more sukuk issuances can be expected this year,” he told The Malaysian Reserve (TMR) last week.

Malaysian Rating Corp Bhd (MARC) maintains its issuance projection for total corporate bond (sukuk and conventional) between RM110 billion and RM120 billion for 2020.

The rating agency expects a slight moderation in Malaysia’s total corporate sukuk issuance compared to last year.

MARC chief economist Nor Zahidi Alias said gross issuance of Malaysia Government Securities/Government Investment Issue this year is forecast to be around RM110 billion to RM120 billion as well.

“Given gross issuance of corporate sukuk represents roughly 70%-75% of total corporate bond issuance in the past few years, we are of the view Malaysia’s corporate sukuk issuance will be circa RM80 billion to RM90 billion in 2020.

“We think 2020 will be another relatively strong year for sukuk given the already low yield environment and rising expectations of accommodative fiscal and monetary policies,” he told TMR.

He added that this is partly due to the fact that Malaysia posted a lower than expected economic growth of 4.3% in 2019 and the worsening of the Covid-19 outbreak will likely lead to an adverse repercussion on the economy at least in the first half of the year.

“As such, many investors expect policymakers to intervene in order to support growth in 2020. This will continue to support issuance activities and buying interests of sukuk in Malaysia,” he said.

Malaysia sukuk issuance full year 2019 has not been released yet. As at end-June 2019, the gross issuance value of the Malaysian sukuk market had surpassed RAM Holdings Bhd’s (RAM Ratings) projection of RM100 billion-RM120 billion for the entire year.

The 38.3% surge to RM136.9 billion (end-June 2018: RM99 billion) was primarily driven by a 61.1% spike in BNM’s issuance of Islamic securities to RM14.5 billion, followed by the corporate sector with RM65.1 billion (+55.5%) (including a RM27.6 billion one-off issue from Urusharta Jamaah Sdn Bhd — an SPV set up by the Ministry of Finance) and government issues (+9.9% to RM39 billion).

Given the dearth of high-quality liquid assets for Islamic financial institutions vis-à-vis complying with BNM’s liquidity coverage ratio, RAM Ratings noted.

BNM’s issuance of Interbank Islamic Bills is expected to have accelerated further last year. Nevertheless, its future performance will be subjected to market demand and liquidity, which appear promising at the moment.

According to Fitch Ratings Inc, global sukuk issuance rose 6% in 2019 as the range of issuersand investors broadened, although supply was concentrated geographically. The rating firm said long-standing structural impediments to growth remain as more corporates tap the sukuk market, potentially including those with weaker credit profiles, legal precedents could eventually be set clarifying creditor treatment in a default.

Sukuk issuance with a maturity of more than 18 months from the Gulf Cooperation Council (GCC) region, Malaysia, Indonesia, Turkey and Pakistan totalled US$42.2 billion (RM174.71 billion) in 2019, up from US$39.8 billion in 2018.

The 2019 figure was nearly 40% higher than 10 years earlier, although below the record high reached in 2017, the rating firm stated in a release last week. Last year’s increase was driven by an uptick in the fourth quarter of 2019.

“Decisions by major borrowers to tap the market are still a significant determinant of sukuk volumes,” Fitch said. Sukuk supply has diversified geographically over the last decade, having initially been dominated by issuers from Malaysia and Bahrain. A more recent trend has been diversification by investor and issuer type.

Robust demand from the traditional investor base of Islamic banks who buy for investment and liquidity management purposes has been boosted by other regional and international investors, some of whom have dedicated sukuk funds or sub-funds, Fitch noted.

The inclusion of both conventional bonds and rated sukuk from five GCC countries in the JP Morgan EM Bond Index from 2019 has supported this process.

Fitch’s forecast lower average oil prices in 2020 and 2021 imply that oil-exporting sovereigns will remain major contributors to overall volumes as borrowing needs increase.

However, smaller deals from non-financial and financial corporate borrowers are also a feature of the market.

“New products and borrowing strategies are still emerging. Local currency and longer-dated issuance has been a recent feature of some markets, such as Saudi Arabia. Indeed, as the sukuk investor base has diversified and been less driven by liquidity management, maturities have extended, increasing the volume of sukuk outstanding,” Fitch stated.

About three quarters of outstanding sukuk will mature in the next nine years, thus refinancing should support issuance volumes over the medium term, it added.