Global sukuk issuance is poised for a big growth in the next five years with the compound annual growth rate (CAGR) of 6.8% reaching $257 billion in 2027. The size of the sukuk market is expected to reach $1.1 trillion in that year, growing at a compounded annual growth rate of 7.9%.
According to a new report by Refinitiv, an American-British global provider of financial market data and infrastructure, global sukuk issuance in the first half of 2022 raised $100.9 billion, marginally lower than $104.2 billion of the corresponding period in 2021.
Despite a strong start to the year, issuance momentum slowed as the US FED and other central banks kicked off a global monetary tightening cycle. The surge in oil prices also contributed to the slowdown in issuance, as it reduced government borrowing needs in core sukuk markets.
A new sukuk issuance record had been set in 2021 for the fifth consecutive year, reaching a total of $196.5 billion. Although this was a rise of 8.2% from $181.6 billion in 2020, that compares with much greater average annual growth of 21% in the previous five years, the report said.
Malaysia, Saudi Arabia and Indonesia remained the largest issuance bases for sukuk and together made up nearly 75% of sukuk issued in 2021 through to H1 of 2022.
Malaysia maintained its leading position, although issuance of $34.8 billion during this period was down 14% from H1 of 2021 as rising commodity prices drove a post-COVID-19 economic recovery.
However, with inflation now posing a threat to that recovery, government subsidies and cash assistance to mitigate its effects will increase pressure on government spending and ensure the sovereigns will remain active in capital markets.
In Saudi Arabia, sukuk issuance raised $28.1 billion during H1 of 2022, compared with $24.2 of billion during the same period of 2021, despite the surge in oil prices. Still, issuance slowed during Q2 as the Kingdom registered a surplus from higher oil revenues.
As with most GCC governments, issuances supporting new and continuing infrastructure projects will likely be offered once volatility in global financial markets calms. This is also the case with ESG issuances that are in the pipeline awaiting more conducive conditions.
Sovereigns continue to drive sukuk issuance, maintaining around a 60% share of global issuance since 2017. Sovereign sukuk issued in H1 of 2022 totalled $68.8 billion, of which 83% were issued by GCC, Malaysian and Indonesian governments.
The Saudi government was the largest sovereign issuer in H1 of 2022, with $22.1 billion, despite soaring oil prices having reduced government funding requirements. Corporate issuance amounted to $19.7 billion, down 7.8% from a year prior due to rapidly increasing interest rates. Issuance from corporates is likely to moderate by the end of the year, with expectations of as many as seven Fed rate hikes across the year.
“Yet, as economic activity resumes, the anticipation of further policy rate hikes may nudge corporate issuers to bring forward debt issuance in order to lock in current lower rates, led by the financial services, infrastructure and utilities industries,” the report pointed out.
Higher Interest Rates
The momentum of international sukuk issuance slowed in 2022, despite strong activity from issuers capitalising on high demand from international investors early in the year. Dollar sukuk issuance amounted to $22 billion in H1 of 2022, down 10% from $33.2 billion in H1 of 2021, as issuers concentrated their borrowing in domestic markets and the Federal Reserve’s tightening policy strengthened the dollar.
While corporate dollar sukuk increased, sovereigns relied on borrowing from domestic markets in H1 of 2022.
Federal Reserve economists project further increases will lift the benchmark rate to a range of 3.25% to 3.5% by the end of the year, which will likely deter some issuers from international markets.
However, as the aggressive monetary tightening policy pushed up the dollar, emerging debt markets saw huge sell-offs and outflows of foreign investment. Return differentials between debt, including sukuk, in developed versus emerging markets led international or foreign investors to return to developed debt markets.
While some of these investors will return to the sukuk market seeking high yields, demand will be driven mainly by investors in the domestic market.
Secondary Market Resilient
The global sukuk secondary market grew during H1 of 2022. The value of sukuk outstanding reached $726.8 billion, up 4.4% from the end of 2021 and reach $742.3 billion by end of 2022. The secondary sukuk market is highly concentrated within the three largest jurisdictions – Malaysia, Saudi Arabia and Indonesia – which together made up 80% of the value of sukuk outstanding in H1 of 2022.
Sukuk markets fared better than emerging market bonds, with the former supported by a boom in oil prices and most issuers’ limited exposure to the Ukraine conflict. The FTSE Emerging Markets Broad Bond Index in 2022 had its worst start to a year in 25 years, as emerging market debt underperformed most fixed income markets, fuelled by multiple rate hikes, inflationary pressures and geopolitical developments, the report said.
Following a five-year record streak, global sukuk issuance is set to moderate in 2022. The Refinitiv sukuk supply and demand model projects sukuk issuance to settle at $185 billion by the end of the year.
In the 2022 Refinitiv sukuk survey, 41% of respondents indicated they were still bullish about growth in global sukuk supply, expecting issuance to reach $180 billion or more in 2022.
Continued robust demand for sukuk and increasing budgetary pressures on emerging economies such as Malaysia, Indonesia and Pakistan have buoyed global issuance so far in 2022, reducing the likelihood of a significant drop in issuance over the full year, the report concluded.