Sovereign Sukuk issuance to rise more than expected

DIFC – Dubai, August 11, 2020 —

• Full-year sovereign sukuk issuance expected to rise by more than 40% to $92 billion
• Sukuk market’s growth prospects remain strong as Islamic finance expands

A recovery in market conditions and an increase in the gross borrowing requirements of the world’s largest sukuk sovereign issuers will fuel a rise in nominal sukuk issuance this year that is greater than Moody’s had expected in March, Moody’s Investors Service said in a report today.

The recovery will support a full-year increase in sovereign sukuk issuance of around 40% to $92 billion in 2020. However, despite an increase in nominal issuance, Moody’s still expects the proportion of sukuk in the funding mix of major issuers will decline this year.

“While year-on-year sovereign sukuk issuance volumes remained flat in the first half of 2020 despite a significant increase in government financing requirements due to low oil prices and coronavirus related spending,

“we expect that issuance will bounce back over the rest of 2020 as market conditions normalise,” said Thaddeus Best, a Moody’s Analyst and the report’s author.

“Oil and gas exporters like Saudi Arabia and Qatarhave seen their borrowing requirements increase the most since March, but Indonesia, Malaysia and Turkey will also see sizeable increases this year.”

During the coronavirus crisis, sovereign debt management offices have shown a preference for conventional issuance, which is typically more expedient than sukuk issuance. For sovereigns with liquid government assets like Saudi Arabia, the spike in borrowing costs between March and April also increased the attractiveness of drawing down liquid assets compared to debt issuance.

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

The largest proportional fall of sukuk in the total funding mix are likely in Saudi Arabia and Turkey, although issuance in nominal terms should rise for both sovereigns.

Beyond 2020, the sukuk market’s growth prospects remain strong. The slow recovery in oil prices is likely to keep funding requirements of GCC sovereigns elevated over the next three years, which Moody’s expects to continue to be met through a mix of conventional and sukuk instruments.

Furthermore, the Islamic finance sector remains underrepresented in global finance and many predominantly Muslim countries, such as Turkey, Saudi Arabia, Indonesia and Malaysia, are pushing to expand Islamic finance to meet the needs of their populations.

Subscribers can access the report at: http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1239894