Worldwide Sukuk issuance set to stall in 2015, says S&P

DUBAI - The global sukuk market is heading toward a correction in 2015 after the Central Bank of Malaysia (BNM), one of the largest issuers of sukuk worldwide, stopped issuing earlier this year, says ratings agency Standard & Poor's.

But BNM’s move leaves the way open to issuers such as the International Islamic Liquidity Management Corporation (IILM) and the Islamic Development Bank (IDB) to step up their issuance and provide the industry with liquidity, contributing to the development of an Islamic yield curve, S&P adds.

"In the first half of 2015, BNM's pullback saw total sukuk issuance drop by
42.5% compared with the same period a year earlier, says S&P’s Global Head of Islamic Finance, Mohamed Damak. "In 2014, BNM alone issued about
US$45 billion of sukuk out of a total issuance of US$116.4 billion.

"We understand part of the reason behind BNM's decision was that its sukuk were subscribed to by a broad array of investors, preventing them from reaching their intended end-users (primarily Malaysian Islamic banks for liquidity management purposes). As a result, BNM decided to switch to other instruments restricted to banks."

Excluding the BNM effect, the worldwide volume of sukuk issuance performed in line with S&P’s expectations, total issuance dropping by only 10.7%, confirming that the impact of falling oil prices on recurring Government spending and investment projects in core markets (namely Gulf Cooperation Council [GCC] countries and Malaysia) was limited in the first half of 2015.

“While we expect this trend to continue in the second half of 2015, the effect of lower oil prices on sukuk issuance in 2016 remains uncertain. Such an effect will depend on whether there is a recovery in oil prices or whether governments in core markets decide to reprioritise their spending, avoid continuing using their reserves, and tap the capital markets more aggressively to finance their spending,” S&P says.

“Sukuk market performance in the first half of this year was also aided by returning sovereign issuers (from core and noncore markets) and large, albeit sporadic issuances from banks and a few nonfinancial companies (corporates) in the Gulf states and Malaysia.” www.standardandpoors.com (ATI).