Fitch Ratings is of the opinion that the near-term sukuk market activity will be slow in the core markets of the GCC, Malaysia, Indonesia, Turkey, and Pakistan (including multilaterals) amid continued volatilities, as will bond market activity.
The agency alludes to rising interest rates (2022F/2023F US interest rate: 4%), high oil prices (2023F: USD85 per barrel), geopolitical events, and lower emerging-market debt appetite propelled a 14.4% quarterly fall in total sukuk issuance in the core markets in 3Q22, with bond issuance falling similarly (down 14.1%).
“The sukuk pipeline is developing behind the scenes, and waiting for the right market conditions, despite the fall in issuance last quarter,” said Bashar Al-Natoor, Global Head of Islamic Finance at Fitch Ratings. “Although oil-exporting countries have benefitted recently from high oil prices, they will still need funding in the medium- to long-term to meet their various strategies. However, oil-importing nations will need these sources of funding while global volatilities remain,” said Al-Natoor.
Sukuk demand will stay intact, enabled by Islamic banks – sukuk’s traditional investor – whose liquidity will be lifted by high oil prices. Funding diversification plans across sectors, upcoming debt maturities, and further maturity of the domestic debt capital market in a number of countries will continue to drive sukuk issuance.
The number of Fitch-rated outstanding sukuk expanded by 7.3% qoq in 3Q22, to a volume of USD133.9 billion, 79% of which was investment-grade. Global outstanding sukuk reached USD749.6 billion, up 2.1% qoq. The strengthening US dollar has nudged non-pegged sukuk issuers to raise funding in the domestic market. ESG-related sukuk were up 2.8% qoq, with USD20 billion outstanding in 3Q22.
Short-term sukuk issued by governments are present in markets such as Malaysia, Indonesia, Bahrain, Turkey, Qatar and Pakistan, providing Islamic banks a venue to invest their excess liquidity. Still-developing markets, like Oman, Jordan, Nigeria, and Egypt, do not have short-term government sukuk.
