S&P offers explanations for falling Sukuk issuance

S&P offers explanations for falling Sukuk issuance

Global sukuk issuance fell to $44.2bn in the first half of 2018, compared to $52.2bn in the first half of 2017, according to a new report by S&P Global. The report notes that the decline in foreign currency sukuk issuance was particularly steep due to the absence of major issuance by the GCC countries, compared to 2017. 

Malaysia accounted for 50% of issuance in the first half of 2018, compared to 37% during the whole of 2017 and 42% during the whole of 2016. The increased issuance was due to issuance by both the government and local corporates. S&P notes that the repeal of Malaysia's goods and services tax, without sufficient revenue raising measures to offset it, could result in higher financing needs for the government.

Other Asian countries accounted for 13% of issuance in the first half of 2018, 16% in the whole of 2017 and 21% in the whole of 2016. 

Equivalent figures for the GCC were 33%, 43% and 25% in the whole of 2016. 

S&P identifies four main reasons for the decline in global sukuk issuance:

1. Global liquidity tightening and the expectation of higher interest rates. S&P says that European and US-based investors generally account for about a quarter of sukuk investment in terms of volume. 

2. Increased perceptions of Geopolitical risk: S&P says that the boycott of Qatar has weakened investors' view of the cohesiveness of the GCC countries, and that, "shifts in Saudi Arabia's power structures and societal norms" have also attracted a lot of attention.

3. Reduced financing needs of GCC countries as liquidity conditions improve thanks to higher oil prices. 

4. Lack of standardisation of sukuk documentation. Specifially, S&P notes that, "fixed-income investors tend to shy away from instruments with limited visibility on post-default resolution," and that, "Standard legal documentataion provides clarity for investors on the recourse options available in the event of a default of a conventional bond. This is still lacking in Islamic finance." 

Finally, the S&P report addresses the issue of Dana Gas. Although not attributing the recent drop in sukuk issuance in the GCC to the Dana Gas case, S&P says that the underlying issues are supressing investors' appetite for GCC sukuk. 

The S&P report is entitled "Why the Global Sukuk Market is Stalling in 2018". It is dated 19 June 2018 and full report can be seen here.