Rating outlook for sukuk remains challenging due to Covid-19, low oil prices

The expansionary 2021 budget is likely to spur issuance of govt securities, including GII, says expert


MALAYSIA’S sukuk market issuances are expected to fall this year as the uncertainty caused by the Covid-19 pandemic has led companies to be more cautious, according to RAM Rating Services Bhd.

The rating firm forecasts issuance of private debt securities (PDS) to hit RM100 billion-RM110 billion, comprising quasi-government and corporate bond issuances.

Its head of Islamic finance Ruslena Ramli said this is based on a five-year historical average of 62% of total PDS comprising sukuk issuance.

“Hence, our sukuk forecast for Malaysia in 2021 is estimated at RM60 billion-RM70 billion taking into account a slower pace of economic growth as companies reassess future growth prospects post- Covid-19,” she noted in an email last Friday.

She noted that as at end-December 2020, total PDS stood at RM104.6 billion of which RM77 billion (73.6% of total PDS issuance) were sukuk.

iFAST Capital Sdn Bhd fixed income analyst Ganageaswaran Arumugam foresees Bank Negara Malaysia to remain accommodative in its monetary policy and keep interest rates low in 2021, which would in turn encourage firms to tap the capital markets for fresh funds.

“We anticipate corporate bonds, including sukuk issuances, to pick up on the back of continuation of existing and new large infrastructure projects earmarked by the government,” he said.

The expansionary 2021 budget should spur issuance of government securities, inclusive of government investment issue (GII), explained Ganageaswaran.

“As part of Budget 2021, the government has also made sustainable bonds a key agenda and broadened the existing income tax exemption for SRI (sustainable and responsible investment) green sukuk grant to include all types of sukuk with an extension up to 2025,” he added.

Meanwhile, Fitch Rating Inc expects global sukuk supply to accelerate in 2021 as issuers seek to refinance maturing debt and fund large budget needs, while the normalisation of relations between Qatar and its Gulf Cooperation Council (GCC) neighbours will encourage fresh activity.

Innovative and diverse issuances like green, sustainable, transition and hybrid sukuk are likely to continue to attract wider investor demand, Fitch noted, adding that it expects regulatory drive towards standardisation to continue.

The proportion of sukuk from issuers with negative outlooks increased sharply to 23.4% in 2020 compared to 2019 at 1.5% due to Covid-19-related disruption and low oil prices, according to Fitch.

There was only one international sukuk publicly defaulted in 2020, namely NMC Health plc, while about 81.3% of sukuk were investment grade.

Sovereigns in key Islamic finance jurisdictions are expected to remain major contributors to over-all sukuk volumes.

Issuances from first-time sovereign issuers, financial institutions and corporates are set to increase as they face challenging conditions and take advantage of the current lower cost of funding.

Fitch said Qatari sukuk volumes are expected to gradually rise after the normalisation of relations with its GCC neighbours and the eventual easing of investment restrictions for Islamic investors based in countries such as Saudi Arabia and the United Arab Emirates.

It noted that sukuk issues with maturities of more than 18 months from the GCC region, Malaysia, Indonesia, Turkey and Pakistan fell slightly by 1.9% year-on-year (YoY) to reach US$41.3 billion (RM166.85 billion) in 2020.

The volume of total outstanding Fitch-rated sukuk reached US$118.6 billion YoY, 12.9% higher, while green and sustainable sukuk supply increased sharply by 96.2% to reach US$8.4 billion.

Read our earlier report

Global sukuk volume to fall this year