US dollar sukuk issuance for 2023 is on course to outpace 2022 due to funding needs and diversification strategies, Fitch Ratings says in a new report. However, 3Q23 sukuk issuance in all currencies (USD51.7 billion equivalent) issued in core markets was 12.3% lower yoy, while bond issuance fell by 17% yoy. While the ratings agency expects the last quarter to have a busier issuance window than 3Q23, there is a risk of a fall in investor sentiment and appetite towards sukuk and bonds in emerging markets and the Middle East, amid elevated geopolitical volatilities.
“As expected, the global sukuk market was cooler during the 3Q23 summer break. We expect issuance to inch up in 4Q23.’’ said Bashar Al-Natoor, Global Head of Islamic Finance at Fitch. “In addition to various sovereigns pursing funding diversification and developing their debt-capital markets, GCC banks and corporates are also likely to tap into the segment as the sukuk supply and demand imbalances continue. However, heightened geopolitical volatilities, which could impact sentiment and appetite, should be monitored.”
Fitch expects near-term sukuk issuance to be supported by budget deficits in countries like Malaysia, Indonesia, Turkiye, Bahrain, Kuwait, and Pakistan. We expect sukuk issuance to be supported by funding diversification goals and initiatives that aim to develop the Islamic-finance ecosystem and the local debt capital markets, even in countries where we expect short-term budget surplus, such as UAE, Qatar and Oman.
Sukuk demand is generally intact. However, differences in sharia opinions could limit sukuk liquidity and its acceptability for certain Islamic investors.
Global outstanding sukuk expanded by 9.8% yoy to USD823.4 billion at end-3Q23, with the largest shares in Malaysia (40%), Saudi Arabia (28%), Indonesia (13%), UAE (6%), and Turkiye (3%). Outstanding Fitch-rated sukuk crossed USD150 billion, of which 78.5% is investment-grade.
