Global Sukuk issuance placed to go up above $150bn this season amid low interest

Global sukuk issuance is set to bounce back 2021 up to $151 billion as debtors rush to market Sharia-compliant bonds amid low interest, Mohamed Damak, the global head of Islamic finance at ratings agency S&P Global, said.

The financial recovery in Malaysia, Indonesia and the GCC - three core Islamic finance markets - and the ample liquidity supplied by central banks all over the world will drive growth available in the market, he said in a report.

Total issuance in 2021 is forecast to be in the $140bn-$151bn range. At the low end of estimate, how big is the market this year would be just above the $139.6bn total seen in 2020, but less than the $167bn record witnessed in 2019.

“Market conditions should remain buoyant throughout 2021, with record-low interest levels and abundant liquidity,” Mr Damak said.

“We also expect GDP growth in the key Islamic finance countries … to recuperate from a good sharp recession in 2020 [and] we assume that the cost of oil will stabilise at about $50 per barrel found in 2021. Together, these elements underpin a stronger effectiveness by the global sukuk market in 2021.”

The ratings agency expects $65bn of sukuk to mature this season, with part of that sum apt to be refinanced, which can only help to drive the volume of issuances.

While some sovereigns in core Islamic finance countries will tap the sukuk industry more aggressively in 2021, the marketplace will also take advantage of the increased sale of corporate Islamic bonds.

“Their activity was muted in 2020 as they held on to cash and deferred capital expenditure due to the pandemic," Mr Damak said. “They [corporate sector issuers] are likely to execute a few of this capex in 2021, thereby necessitating access to capital markets.”

First Abu Dhabi Bank, the UAE's most significant bank by assets, on Mon said it raised $500m through the cheapest ever yield on a five-year dollar-denominated sukuk by a Middle East and North Africa bank. Pricing on the primary dollar sukuk package of the year represented a “bad new issue premium” when compared to FAB’s January 2025 maturity sukuk, the lending company added.

Central banks all over the world have rolled out monetary stimulus measures this past year to support economic markets and limit the impact of the pandemic on the economies. Interest costs have been established near or below zero in lots of countries.

Lower interest prices are anticipated to remain set up this season and beyond, seeing as the global overall economy continues to recover. The International Monetary Fund expects global GDP to broaden 5.2 % found in 2021 after contracting 4.4 per cent last year.

“We expect central banks will keep rates of interest exceptionally low and continue steadily to offer liquidity support as important,” Mr Damak said.

S&P estimate a good sukuk market revival is founded on the assumption that the pandemic should come under control gradually found in the core countries from the second one fourth of 2021, through a combination of vaccines, medical treatments and testing.

Market conditions should remain buoyant throughout 2021, with record-low interest levels and abundant liquidity

Mohamed Damak, global head of Islamic finance by S&P Global Rating

However, downside risks for the key Islamic financing countries remain significant, including their ability to control the pandemic despite having the option of vaccines.

“The primary risk is that further waves of Covid-19 and the requisite containment measures may damage the countries' fragile economic recovery,” Mr Damak said. “This could affect the countries directly, or indirectly through lower commodity rates, exports and capital flows.”

S&P predicts the quantity of defaults or perhaps restructurings among sukuk issuers with low credit quality will increase in 2021 due to “regulatory forbearance methods come to a finish”.

“This will test the robustness of the legal documents used for sukuk issuances,” it warned.

Mr Damak expects a unified global legal and regulatory framework for Islamic finance industry to emerge over the next 12 to18 months.

“We assume that such a framework could help resolve the lack of standardisation and harmonisation that the Islamic finance industry has got faced for many years.”