After Record Total Offerings of US$205bn in 2020, Global Sukuk Issuances Set to Maintain its Buoyancy in 2021

The resilience of Sukuk issuance especially during times of crisis such as the ongoing COVID-19 pandemic, now well into its second year, continues in 2021 with total gross short and long-term Sukuk issuance projected to reach near if not surpass the record US$205 billion volume in 2020.

Both Moody’s Investors Service and the International Islamic Financial Market (IIFM) concur that the Sukuk issuance momentum will continue on a stable basis in 2021, judging by the actual and planned pipeline of offerings thus far in the first half of the year, with low market penetration and new entrants supporting the sector’s long-term growth.

In his Sukuk Sector Report in early September 2021, Ashraf Madani, VP and Senior Analyst at Moody’s, emphasized that “Sukuk issuance will be flat or slightly lower this year, as higher oil prices have reduced sovereign funding needs in GCC countries. We expect total gross short- and long-term Sukuk issuance in 2021 to reach between US$190 billion and US$200 billion after a record US$205 billion in 2020.”

This is supported by the fact that 2021 started strongly with some US$102 billion in Sukuk issued in the first six months of the year, up from US$99 billion in the same period in 2020. “Reduced issuance from GCC governments was partly offset by stronger activity in the corporate sector, while issuance rose significantly in Southeast Asia. We expect issuance of between US$90 billion to US$100 billion in the second half of the year, bolstered by continued economic recovery, improved liquidity in debt markets and strong investor demand. However, sovereign issuance from GCC countries will be lower than in the same period last year due to smaller fiscal deficits on account of higher oil prices,” added Madani.

Moody’s rationale is underpinned by the fact that:
i) Sukuk issuance increased by 3% in the first six months to US$102 billion as activity picked up in Malaysia and Indonesia.
ii) Issuance in Southeast Asia increased by 22%, while volumes in the GCC declined by 19%.
iii) Improved market conditions led to a strong rebound in corporate issuance but sovereigns remained the largest issuers by value.
iv) Issuance activity is expected to remain healthy in the second half of 2021 driven by increased sovereign activity in Malaysia and Indonesia where funding needs remain high.
v) Green Sukuk issuance will also accelerate as governments promote sustainable policy agendas and as demand for sustainable investments encourages new issuers to consider green sukuk as an alternative financing tool.
vi) A steady stream of new issuers has joined the Sukuk market in recent years, a trend which is projected to continue. They include Bangladesh, Oman, Morocco, Maldives, Pakistan at the sovereign level, and an even bigger number of corporate issuers in the Middle East, Asia and elsewhere.

The coronavirus pandemic widened fiscal deficits across major Sukuk issuing sovereigns in 2020 and higher borrowing needs pushed issuance above US$200 billion mark for the first time. However, higher oil prices, says Moody’s, will increase GCC sovereigns’ revenue and narrow their fiscal deficits in 2021 leading to lower issuance activity.

While this may be true to a certain extent, Moody’s take may be too optimistic given that the sustainability of higher oil prices is likely to remain volatile especially if new variants of COVID-19 emerge and the extent of their resultant impact on fiscal deficits especially if new lockdowns and rescue packages, albeit smaller, are warranted. In mid-September the benchmark Brent crude oil futures were trading at US$74.32 per barrel.

In addition, GCC countries are beholden to massive new projects which cannot be funded out of their revenue bases only. Saudi Arabia’s Vision 2030 and the Meon City project, for instance, would require massive injections of funding unless the ambitions are downgraded. Fitch Solutions’ infrastructure project pipeline similarly projects US$1.6 trillion of spending in this sector in the MENA region and US$5 trillion in the Asia region, with transport and renewables infrastructure by far the top investment sector priorities.

This means that the potential for raising funds through Sukuk issuance as in Saudi Arabia, Malaysia and Indonesia should increase exponentially rather than flatten out.

“The fiscal deficits of Malaysia and Indonesia,” Moody’s agrees, “will remain wider for longer. We also expect increased issuance activity from corporates and banks amid improved economic conditions and easier access to capital markets. These new issuers will partially offset the decline in activity among the hydrocarbon exporting countries. Longer term, our projection is for Sukuk issuance to continue to expand, supported by rising interest from both issuers and investors.”

The good news is that more sovereign issuers are promoting their Islamic finance agendas and are increasing the share of Sukuk in their funding mix whenever market conditions are favourable. “Every year we are seeing new Sukuk issuers who are seeking to diversify their funding sources, and in 2021 Saudi Aramco and Maldives made debut sukuk issuances. The appeal of Sukuk as an investment tool is growing as shown by high demand for issuances. It has become normal for the order book to exceed the offered amount by three or four times, especially for creditworthy borrowers. And demand for the instruments is increasingly coming from international players in markets less exposed to Islamic finance,” observed Moody’s Ashraf Madani.

Moody’s sees Malaysia, Indonesia, Saudi Arabia, Kuwait and Turkey dominating Sukuk issuance going forward. However, to put Sukuk as a fixed income and debt instrument in its global finance context, it remains underrepresented comprising only 5% of global financial assets. By comparison, the Muslim world population, at around 1.8 billion and expanding, makes up 24% of the global population. Many majority-Muslim countries, such as Turkey, Indonesia and Malaysia, are promoting growth of Islamic finance to meet the needs of their populations and to diversify their financing mix.
The low global finance market share however underlines huge potential for Sukuk both in traditional markets and in new markets including non-traditional ones in Africa such as South Africa, Kenya and Uganda.

The same scenario exists in green and sustainable Sukuk, which have seen strong growth since the first Green Sukuk issued by Malaysia’s Tadau Energy (Edra Power) in 2017. Nevertheless, the market remains in its infancy, accounting for only 3% of total Sukuk issued.

In contrast, the IIFM 2021 Sukuk Report put Sukuk (short term & long term) issuances at US$174.6 billion in 2020, a 19.84% year-on-year increase.

“The high volatility in Sukuk issuances globally from one year to the next,” noted the IIFM, “is reflective of the concentrated nature of the market. Over 90% of the US$648 billion outstanding Sukuk belong to just a handful of key markets – Malaysia, Indonesia, GCC and Turkey. However, this trend is slowly changing, with high potential jurisdictions such as Pakistan, Bangladesh, Egypt and Nigeria becoming more active in the Sukuk space.”

Although the effects of the unprecedented situation caused by the COVID-19 pandemic continued during the year, the impact of the pandemic, added IIFM, was confined and limited to a few corporate issuers and overall Sukuk remained an attractive instrument and the positive growth trajectory continued during first half of 2021.

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