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Saudi, Indonesia played a major role in the decline of local currency-denominated sukuk issuances globally in 2023: A drop in SAR-denominated sukuk issuances last year, along with the concurrent decline in Indonesia, contributed to the 17% y-o-y in global issuances in 2023, according to S&P Global’s latest Sukuk Outlook report.
In context:The government pushed ahead with SAR 45.6 bn in SAR-denominated sukuk issuances in 2023 — a 43% decline from 2022, according to Saudi National Debt Management Center (NDMC) figures.
The rationale- Supporting liquidity in the banking system: The sharp decline in SAR-denominated sukuk issuances is attributed to the government’s plan to preserve liquidity in the banking system rather than tying it up to bonds of varying maturities, wrote Mohamed Damak, S&P’s primary credit analyst. Indonesia is a different story: Jakarta’s drop in issuances is attributed to its fiscal consolidation strategy, prompting the government to take on less debt.
The regional angle: The UAE and Turkey experienced growth in local currency-denominated issuances, primarily propelled by increased government initiatives to prop up their local capital markets. Look for the UAE to see a surge in issuances in the coming years, the report reads.
FCY SUKUK-
The increase in foreign currency-denominated sukuk issuances by KSA, the UAE and Egypt — among others — helped grow total FCY sukuk issuances by a third last year.
In context:KSA accounted for nearly a third (28%) of the total USD 823 bn international sukuk outstanding as of 3Q 2023, Emirates news agency WAM reports quoting Fitch Ratings’ Bashar Al Natoor as saying. Malaysia leads the global market with a 40% share, followed by Indonesia (13%), the UAE (6%), and Turkey (3%).
The outlook- Higher financing needs are expected to trigger market growth: The global foreign currency-denominated sukuk market is expected to expand, propelled by higher financing needs in Riyadh and other Islamic finance countries, S&P’s Damak writes. This is going to be supported by a more predictable monetary environment, considering the expectations for interest rate cuts this year.
2023 in a nutshell: Global sukuk issuance (in local and foreign currencies) declined 6% y-o-y to USD 168 bn in 2023.
THE OUTLOOK: 2024
The rating agency forecasts that global sukuk issuance will total USD 160 bn to USD 170 bn in 2024, including foreign currency-denominated issuance of USD 45 bn to USD 50 bn. Find the government’s calendar for the 2024 sukuk issuances here. “It is also worth noting that Saudi Arabia and its Vision 2030 program boosted issuance in 2023 and will continue to do so in 2024,” according to Damak.
** The first SAR-denominated sukuk issuance in 2024: NDMC closed a SAR-denominated sukuk issuance worth SAR 8.8 bn, it said in a statement yesterday. Some SAR 3.7 bn have been allocated to the first issuance maturing in 2029, along with SAR 2.8 maturing in 2034, and SAR 2.3 bn in 2039.
Regional climate ambitions will prop-up sustainable sukuk: “As Islamic finance remains concentrated in oil exporting countries that aim to reduce their carbon footprints, we [S&P Global] expect the increase in sustainable sukuk issuance will continue.” Green sukuk accounted for the majority of sustainable sukuk issuance in 2023, and the UAE alone accounted for 40% of total sustainable sukuk issuance last year.
Digitalization has the potential to create opportunities by streamlining the issuance of sukuk, Damak writes, adding that this is not possible without the establishment of a standardized interpretation of Sharia principles.
The caveat: “The lack of a standardized interpretation of the Sharia could cause some disruption over the medium term, especially considering the potential adoption of the Accounting and Auditing Organization for Islamic Financial Institutions’ (AAOIFI) Shariah standard 62.”
The draft Standard 62 transfers an avalanche of risk to the sukuk holder: This yet-to-be-finalized standard drafted by AAOIFI mandates the transfer of ownership and associated risks related to the underlying assets to sukuk holders. Consequently, the repayment of the sukuk may increasingly hinge on the performance of the underlying assets, their market valuation, or the decision of sukuk holders to sell these assets to external parties.
A risk to the market? If adopted, the Shariah standard 62 could lead to “conventional fixed income investors might shy away from the sukuk market,” S&P says.
