Sukuk issuance stalls on subdued economy


TOTAL Islamic bond or sukuk issuance could potentially take a hit this year, dragged by subdued economic growth.

In 2018, when Malaysia’s GDP growth slowed to 4.7%, sukuk issuances fell by 2.6%. In 2019, when real GDP growth moderated further to 4.3%, sukuk issuances slipped by 2.3%.

However, the current low interest-rate environment and the accommodative policy by Bank Negara Malaysia (BNM) will, to some extent, prevent sukuk issuances from falling too significantly this year, according to Malaysia Rating Corp Bhd (MARC) chief economist Nor Zahidi Alias (picture).

“As the government continues to proceed with development projects — in order to ensure the economy is well-supported at a time when we are facing multiple headwinds — we will see some issuances from the quasi-government segment.

“Notwithstanding this, the downside risk remains especially if the Covid-19 outbreak continues to be unmanageable and lockdown periods across global economies continue,” he told The Malaysian Reserve (TMR).

Fitch Ratings Inc global head of Islamic finance Bashar Al Natoor said the Covid-19 outbreak is negatively impacting primary sukuk markets’ activity and significantly increasing volatility, putting sukuk markets on almost a standstill.

He said the global sukuk market saw strong market activity during the first two months of 2020.

“However, now many of the issuing countries face an unprecedented combination of challenges, including health issues, reduced oil revenues, economic disruption, severe financial market dislocation and changes in liquidity and investor sentiment.

“These developments are currently negatively impacting new sukuk issuances, as the increasing volatility has triggered many issuers and investors to withdraw from markets,” he told TMR in an email reply.

Policymakers globally are using fiscal and monetary tools to soften the economic and financial impact of the Covid-19 outbreak. The US Federal Reserve’s move to lower its benchmark to a near-zero rate prompted central banks across many sukuk active markets to cut their interest rates.

He said many central banks of oil-exporting countries have launched stimulus packages and instructed banks to grant grace periods on loan repayments for private sector firms.

“While major uncertainties remain as to the duration and intensity of the Covid-19 outbreak, as and when the situation stabilises, and once investors and issuers have readjusted, sukuk issuances are expected to gradually pick up led by higher-rated Gulf Cooperation Council (GCC) sovereigns.

“This is reflective of the high borrowing needs amid expanding fiscal deficits, slower economic growth and that a sizeable portion of GCC bonds and sukuk are coming due in short to medium term,” he added.

Additionally, seeking higher yields, international investors could also be drawn to the sukuk market as these instruments offer higher returns.

However, RAM Rating Services Bhd maintains its current corporate bond/sukuk issuance projection for 2020 at RM100 billion-RM110 billion despite its recent downward revision in Malaysia’s GDP growth.

RAM Ratings may revisit this number while closely monitoring the increasing downside risks from the Covid-19 and deteriorating external environment, as well as changes in the domestic political landscape.