Sukuk issuance expected to jump 40% this year after Covid-19 and oil price crash

13 Aug 20

Higher funding needs from responding to Covid-19 along with declining oil sales will lead to greater sukuk issuance this year by the largest sovereign issuers, despite its decline as an overall share of funding, a report has predicted.

The issuance of sukuks, often described as ‘sharia-compliant bonds’, will reach $94bn in 2020 – 43% more than last year – the paper, released by ratings agency Moody’s, suggested.

Year-on-year, despite the huge borrowing needs caused by the pandemic, issuance was broadly flat in the first half of 2020, Moody’s said, due to a deterioration in market conditions and sukuks’ relative complexity compared to conventional debt instruments.

In Gulf Cooperation Council states, issuance fell. Saudi Arabia issued $6.8bn, compared to $9.4bn in the first half of 2019, and Qatar issued none at all, despite an expected $6.4bn fiscal deficit this year.

But as market conditions recover, and with no sign of borrowing requirements dropping off, Moody’s has predicted the use of sukuks will see “sizeable increases” in both of these countries, with oil prices stabilising at lower than expected amounts, as well as in Indonesia, Malaysia and Turkey.

Indonesia has announced stimulus measures to respond to Covid-19 worth nearly $50bn, and now expects its deficit to reach 6.3% of GDP, and nearby Malaysia now predicts its own deficit will reach 5.8% after announcing $2.4bn of cash handouts to boost household consumption.

The Turkish government has committed about $15bn of stimulus measures so far, including expanding social transfers, tax cuts and support for industries such as tourism, leaving its fiscal deficit expected to rise from 4.6% of GDP last year to 7.5%.

These will require borrowing, and the growing appetite for shariah-complaint products in many of these countries means the report projected continued growth of sukuk issuance in the medium term.

But despite this, Moody’s predicted that sukuks will decline as a share of government funding “largely due to the preference for conventional issuance over sukuk during the period of elevated market volatility in the second quarter of 2020”.

“In many cases, domestic sukuk markets have not reached sufficient depth to meet the sudden increase in financing needs like in this most recent crisis,” the report said.

“Additionally, while the spread has narrowed, sukuk issuances continue to attract a slight premium over their conventional counterparts, which may disincentivise issuers who are already grappling with higher borrowing costs.”

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