Saudi Arabia’s record USD9 billion sukuk reinforces our expectation that total 2017 issuance in core Islamic finance markets will grow at least as rapidly as it did last year and that market-share will rise, Fitch Ratings says. The heavily oversubscribed Saudi sukuk suggests the main limitation on growth is likely to be the relatively limited pool of potential near-term issuers, rather than limited demand.
New sukuk issuance with a maturity over 18 months from the core Islamic finance markets of the Gulf Cooperation Council (GCC) region, Malaysia, Indonesia, Turkey and Pakistan totalled USD24.1 billion in the first four months of the year. This is 11% more than the USD21.7 billion issued in the entire first half of 2016. Sukuk’s share of total issuance in these markets has also risen to 37% so far this year, from 30% in 1H16.
We focus on longer-term issues because frequently rolled-over short-term debt can distort underlying trends. The numbers also do not include a USD1 billion issue by Hong Kong, which is not among our Islamic finance core markets, or a local-currency Saudi Aramco issue equivalent to around USD3bn.
Sukuk issuance in the core markets is already 60% of the total for 2016, but we do not expect any further issues this year to even approach the size of Saudi Arabia’s sukuk, and if the Saudi authorities were to tap international markets again this year, we believe it would probably be via a bond. In addition, the early start to Ramadan this year means sukuk issuance will probably tail off after May. We continue to expect the market to grow at least at a similar rate to the 26% seen in 2016.
Investors placed orders for more than USD33 billion for Saudi Arabia’s sukuk, indicating that there is plenty of appetite for the product. However, volumes remain heavily reliant on a relatively limited number of issuers, mostly sovereigns, and this will remain the main constraint on growth in the near term.
We expect more issuers to enter the market in the longer term. More banks may use sukuk and bonds for reasons including building capital buffers, diversifying their funding sources and taking advantage of relatively low funding costs. These trends will vary from country to country, with economic growth in some areas potentially also supporting issuance.
Corporate issuance will also slowly increase in core markets as structures become more standardized and transparent following the introduction and updating of sukuk laws in the past few years. GCC corporates have traditionally relied heavily on bank lending. However, those that do choose to tap capital markets are more likely to issue sukuk, or a mixture of sukuk and bonds, rather than just bonds, in order to attract a wider local and regional investor base. Some companies are also limited to only sharia-compliant borrowing by their own rules.
Bashar Al-Natoor is global head of Islamic finance at Fitch Ratings.
This column does not necessarily reflect the opinion of the editorial board or Frontera and its owners.