Global sukuk issuance may hit $155bn in 2021, S&P says

Global sukuk issuance is set to increase to as much as $155 billion in 2021, or 11 per cent more than $139.8bn last year, driven by low interest rates and abundant liquidity, according to S&P Global Ratings.

The ratings agency said a more conservative outlook could be in the range of $140bn. Sukuk worth a record $167bn was issued in 2019.

A continued economic recovery, vaccination campaigns in most Islamic finance countries and oil prices of about $65 a barrel this year will also support growth in sukuk issuance, the rating agency said in its market report on Monday.

“Taken together, these factors point to stronger sukuk market performance in 2021 compared with 2020,” said Mohamed Damak, global head of Islamic finance at S&P.

Global sukuk issuance stood at $90.6bn in the first half of the year, slightly more than $86.4bn recorded in the six months to the end of June 2020.

The market's performance was propelled by Sharia-compliant bond sales in Malaysia, Saudi Arabia and Oman. The sultanate returned to the market after issuing conventional debt in 2020.

The market was also supported by a higher primary issuance volume, which rose by 20 per cent in the first half of 2021.

“Absent an unexpected geopolitical event, a significant drop in oil prices or a shift in liquidity conditions on global capital markets, we expect sukuk issuance will continue to rise,” said Mr Damak.

However, issuance volumes in Bahrain, Indonesia, Turkey and the UAE declined. In Turkey, the decline was mainly due to the rise in local currency-denominated issuances while the UAE's sukuk sales dropped as the country adopted new Sharia standards.

“Despite higher oil prices and lower fiscal deficits, we expect that some sovereigns in the Gulf Cooperation Council will continue to tap the market to fund their economic diversification programmes,” S&P said.

It also expects bank and corporate issuance to “continue to support sukuk market performance" in the second half of 2021, after a muted activity in 2020 when companies preserved cash at the height of the pandemic and deferred capital expenditure.

Sukuk worth about $20bn is set to mature in the second half of this year, some of which will probably be refinanced through the market, S&P said.

Central banks around the world have introduced monetary stimulus measures last year to support the banking sector and help stabilise financial markets as part of their efforts to soften the blow of the pandemic on their economies.

Interest rates, which have been set near or below zero in many countries, are expected to remain low this year and beyond as the world economy continues to recover.

The International Monetary Fund expects the global economy, which last year slid into its worst recession since the Great Depression, to expand by 6 per cent in 2021.

The $2.4 trillion Sharia-compliant finance industry is expected to register “low to mid-single digit growth” in 2021. It grew by 11.4 per cent in 2019 on the back of higher-than-expected sukuk issuance, according to S&P Global.

The industry is expected to hit $3.69tn in 2024, according to Refinitiv and a report by the Islamic Corporation for the Development of the Private Sector.

Sustainability-linked and green sukuk issuance will also support the global Islamic bond market in the second half of this year. However, the volume of such Sharia-compliant instruments is expected to remain limited, S&P said on Monday.

During the first half, the Islamic Development Bank issued sukuk worth $2.5bn and said it would use 10 per cent of the proceeds to finance green projects, with 90 per cent earmarked for social development programmes. Malaysia also issued a $1.3bn Islamic bond that included an $800 million sustainability tranche.

“Although these types of instruments may appeal to investors with ESG [environment, social and governance] objectives – and we expect to see more of them – we think that they will be the exception rather than the norm,” said Mr Damak.