Despite the difficult prevailing global economic and geopolitical conditions and the rise in commodity prices especially oil, gas and palm oil, the global Sukuk market has shown its resilience by maintaining issuance volumes in 2022 at only marginally lower levels than for the corresponding period in 2021.
According to Refinitiv’s Sukuk Perceptions and Forecast Study 2022 titled ‘Navigating a New Environment’, global Sukuk issuance in FH 2022 raised US$100.9 billion, marginally lower than US$104.2 billion FH 2021. “Despite a strong start to the year, issuance momentum slowed as the Federal Reserve and other central banks kicked off a global monetary tightening cycle. The surge in oil prices also contributed to the slowdown in issuance, as it reduced government borrowing needs in core Sukuk markets,” observed Refinitiv.
Sukuk’s resilience as a debt raising instrument is underlined by the fact that a new Sukuk issuance record had been set in 2021 for the fifth consecutive year, reaching a total of US$196.5 billion. Although this was a rise of 8.2% from US$181.6 billion in 2020, that compares with much greater average annual growth of 21% in the previous five years.
Malaysia, Saudi Arabia and Indonesia remain the three largest issuers of Sukuk – international and domestic – in 2022 thus far. Together made up nearly 75% of Sukuk issued in 2021 through to FH 2022. Malaysia maintained its leading position, although issuance of US$34.8 billion in FH 2022 was down 14% from FH 2021 as rising commodity prices drove a post-Covid economic recovery. However, stressed Refinitiv, “with inflation now posing a threat to that recovery, government subsidies and cash assistance to mitigate its effects will increase pressure on government spending and ensure the sovereigns will remain active in capital markets.”
In Saudi Arabia, Sukuk issuance raised US$28.1 billion during FH 2022, compared with US$24.2 billion during the same period in 2021, despite the surge in oil prices. Still, issuance slowed during the second quarter as the Kingdom registered a surplus from higher oil revenues. As with most GCC governments, issuances supporting new and continuing infrastructure projects will likely be offered once volatility in global financial markets calms. This is also the case with ESG issuances that are in the pipeline awaiting more conducive conditions.
The main drivers of Sukuk issuance are sovereigns and they will continue to drive Sukuk issuance momentum in 2022 and beyond, maintaining around a 60% share of global issuance since 2017. Sovereign Sukuk issued in FH 2022 totalled US$68.8 billion, of which 83% were issued by GCC, Malaysian and Indonesian governments.
The Saudi government was the largest sovereign issuer in FH 2022, with US$22.1 billion, despite soaring oil prices having reduced government funding requirements. Corporate Sukuk issuance amounted to US$19.7 billion in FH 2022, down 7.8% from a year prior due to rapidly increasing interest rates. Issuance from corporates is likely to moderate by the end of the year, with expectations of as many as seven Fed rate hikes across the year.
However, Refinitiv projects that as economic activity resumes the anticipation of further policy rate hikes may nudge corporate issuers to bring forward debt issuance in order to lock in current lower rates, led by the financial services, infrastructure and utilities industries.
In contrast, Moody’s Investors Service in its latest Sukuk Report maintains that that global Sukuk issuance will fall to between US$160 billion and $170 billion in 2022, from US$181 billion in 2021, as high oil prices reduce the requirements of major Sukuk-issuing sovereigns and as raised interest rates deter issuance by corporates and financial institutions.
“The improved fiscal position of major sovereign issuers is the main reason for the expected drop in volumes this year,” stresses Ashraf Madani, VP-Senior Credit Officer at Moody’s. “In the Gulf Cooperation Council (GCC) region, high oil prices are reducing governments’ financing needs, while in Southeast Asia we expect lower government expenditure because of a decline in pandemic-related spending to reduce governments’ fiscal deficits.”
The key projections by Moody’s are:
i) Sukuk issuance declined by 10% year-over-year to US$92 billion in FH 2022, and Moody’s expects issuance of US$70-80 billion in the second half of 2022.
ii) Higher interest rates will maintain pressure on Sukuk issuance activity, particularly by corporates and financial institutions. Some issuers have deferred their access to the Sukuk market because of volatility in long-term interest rates in the first half of 2022. Moody’s expect this situation to persist into the Second Half of the year as major central banks continue to raise rates to combat inflation.
iii) Sukuk’s appeal and acceptance as an investment tool is growing, as shown by high demand for recent issuances. It has become normal for order books to exceed the offered amount by three or four times, particularly for creditworthy borrowers.
iv) Similarly, demand for Sukuk is increasingly coming from international actors in markets less exposed to Islamic finance.
A good sign is that the Sukuk secondary market was resilient as emerging market debt markets otherwise struggled. Refinitiv maintains that the global Sukuk secondary market grew during FH 2022. The value of Sukuk outstanding reached US $726.8 billion, up 4.4% from the end of 2021. The secondary Sukuk market once again is highly concentrated within the three largest jurisdictions – Malaysia, Saudi Arabia and Indonesia – which together made up 80% of the value of Sukuk outstanding in FH 2022.
Sukuk markets fared better than emerging market bonds, with the former supported by a boom in oil prices and most issuers’ limited exposure to the Ukraine conflict. The FTSE Emerging Markets Broad Bond Index in 2022 had its worst start to a year in 25 years, as emerging market debt underperformed most fixed income markets, fuelled by multiple rate hikes, inflationary pressures and geopolitical developments.
Refinitiv projects a stable outlook for Sukuk supply despite global headwinds. “Following a five-year record streak,” stresses Refinitiv, “global Sukuk issuance is set to moderate in 2022. The Refinitiv Sukuk supply and demand model projects Sukuk issuance to settle at US$185 billion by the end of the year. Sukuk supply, as defined by total sukuk outstanding, reached US$726.8 billion in FH 2022 and is projected to increase to US$742.3 billion by the end of the year.
Refinitiv projects Sukuk issuance to grow at an estimated compounded annual growth rate of 6.8% over the next five years, reaching US$257 billion in 2027. The size of the Sukuk market is expected to reach US$1.1 trillion in that year, growing at a compounded annual growth rate of 7.9%. The model thus projects the supply-demand gap to narrow to US$81.4 billion in 2022 and US$69.1 billion in 2023. The gap is projected to then expand to US$101.4 billion by 2027, as 52% of presently outstanding Sukuk mature by the end of 2027, causing a considerable reduction in Sukuk supply compared to the past five years.
Moody’s on the other hand expects total gross short- and long-term Sukuk issuance of US$160-170 billion in 2022, down from US$181 billion in 2021 and a record US$205 billion in 2020. Issuance reached US$92 billion in the first six months of 2022, down from US$102 billion in the same period of 2021. “Stronger than expected issuance activity from Gulf Cooperation Council (GCC) sovereigns offset a drop in issuance in Southeast Asia and Turkiye. We expect gross Sukuk issuance of $70-80 billion in the second half of the year,” stressed Moody’s.
The rating agency also maintains that new issuers seeking to diversify their funding sources are joining the market as Sukuk becomes widely accepted. It predicts that the issuance of Green Sukuk will also accelerate as governments promote sustainable policy agendas and demand for sustainable investments encourages new issuers to consider Green Sukuk as an alternative financing tool.