Gulf sovereigns continue to dominate dollar sukuk issuance
Dubai: Volumes of sovereign sukuk have increased significantly over the last three years as governments in Asia, the Gulf Cooperation Council (GCC), Europe and now Africa seek to tap increased demand for Sharia-compliant financial assets, however a large portion of these issuance is denominated in local currencies, according to Moody’s.
In the medium term, these international issuances will remain driven by sovereign and government-related issuers from the GCC countries because of their US dollar currency pegs.
Despite recent growth in cross-border sukuk issuance, most sovereign sukuk are issued in local currencies for domestic investors. Of the $105 billion (Dh385 billion) sovereign sukuk outstanding at July 2014, approximately $20 billion are foreign-currency, cross-border instruments of which are almost all denominated in US dollars.
“As global investors becoming increasingly at ease with Islamic instruments, we expect more issuance of cross-border instruments from other jurisdictions such as Indonesia, Malaysia and Turkey to tap this demand,” said Khalid Howladar, Moody’s Global Head for Islamic Finance.
Governments and government related entities (GREs) from the GCC region are expected to be a major supply source for sukuks this year.
According to Moody’s estimates global sukuk issuance this year will exceed the 2013 level to reach around $70 billion, with sovereign issuance increasing to around $30 billion this year. The share of sovereign sukuk in global sukuk markets is larger than in conventional bond markets. The amount of international debt securities reached close to $22.8 trillion in 2013, 7 per cent of which was issued by governments. In comparison, the amount of international sukuk outstanding at the same year-end 2013 was $65 billion, 29 per cent of which was issued by governments.
“The entrance of new issuers will support growth in sovereign sukuk, and increasing volumes — particularly from those of high credit quality governments — will help attract new investors to the sector and provide additional depth and liquidity to the sukuk markets,” said Christian De Guzman, a Moody’s Vice President and Senior Analyst.
In Saudi Arabia Quasi sovereign issuers drive strong domestic market growth. Corporations in Saudi Arabia issued a record 39.4 billion Saudi riyals ($10.5 billion) issuance of riyal-denominated (SAR) sukuk in 2013 following a sovereign-related benchmark sukuk issuance by the General Authority of Civil Aviation (GACA) in early 2012. This strong flow continued in 2014 with another $10.3 billion issued in January-July 2014.
“We expect the Saudi sukuk market to continue to grow, holding its place as the second largest sukuk market after Malaysia. The record issuance was driven by strong investor demand, strong demand from local banks deploying their excess liquidity, increased financing opportunities with respect to the country’s large-scale infrastructure projects and large quasi-sovereign benchmark issuances that have helped to set a yield curve in the country,” said Howladar.
In the UAE, the governments of Dubai, Abu Dhabi and most recently Sharjah are active in the international sukuk market, driven by the US dollar currency peg, large financing needs and leverage appetite. However, given the state dominance of the economy, the majority of issuance has been from government-related borrowers. These issuers collectively lead international issuance globally with over $26.8 billion of sukuk outstanding and have attracted substantial global investor interest.
“While direct sovereign borrowing represents only $5.2 billion of the total, the proportion of sukuk versus conventional issuance is rising. And similar to other GCC sovereigns, this trend is likely to continue given the Dubai government’s explicit ambition to become the centre of the Islamic Economy” said Howladar.
In Qatar, the government has developed a sovereign sukuk yield curve by issuing large, long-term paper to support its Islamic finance policy goals and provide local Islamic banks with a liquid supply of Sharia compliant investments. Despite the small size of its domestic capital market, Qatar’s government is actively helping to deepen the sukuk portion of that market
Despite the relatively small size of its economy, Bahrain has a very deep, but fragmented base of around 24 Islamic financial institutions plus associated funds, takaful insurers, industry bodies and ancillary financial services that are commensurate with its pioneering hub status. While the country may be losing ground in recent years to its larger neighbours in terms of sukuk issuance and banking assets, the Central Bank of Bahrain (CBB, unrated) has indicated that it is focusing on a strong regulatory environment to support its status as key Islamic financial centre.