Anaylsis Markets

Global Sukuk Market : Expanding Its Frontier

Against the backdrop of global macroeconomic challenges and financial pressures in major markets, the fast expanding sukuk market over the years has become an attractive source for various sovereigns? government related entities and corporates to meet their financing needs. In january-November 2014 (“11 M14?), the global primary sukuk market has outperformed 2013 level with total issuances of USD1 1 4.Jbln, compared to USD1 05.Jbln in the same period last year.

The total issuances for the year-to-date have also exceeded the 2011-2013 average of USD1 l2bln and primary sukuk issuances for the full year 2014 look set to exceed the 2013 total of USD119.7bln. Notably, the volume in 2014 witnessed sukuk issuances have expanded to new markets including landmark issuances from the UK, Hong Kong, Senegal, South Africa, the US, the Emirate of Sharjah, Luxembourg and Pakistan; while cross-border issuance activity has accelerated.

By country, in 11M14, Malaysia continued to dominate the sukuk market, accounting for a 64.6% share of total issuances; with Saudi Arabia (10.3%), Indonesia (5.4%), the UAE (5%) and Turkey (3.6%) rounding up the top five markets. Elsewhere, the government of Indonesia was also an active issuer this year, including a dollar denominated USD1.Sbln sukuk in September 2014. As seen in previous years, the share of sukuk from Qatar, Bahrain,Brunei and Gambia reflected mainly short-term sukuk issued by their respective central banks for liquidity management purposes.
The share of UK sukuk includes USD500mln sulmk by the International Finance Facility for Immunisation in November 2014) which is based in London. Compared to 2013, several issuing countries such as Kuwait,Yemen and Nigeria were absent from the market. Global Sukuk 2015 Outlook: “Vibrant Sources of Growth” In 2015, the sukuk market is expected to continue to record issuances of more than USD100b1n (2011-2013 average: USD112b1n), and to expand into a wider variety of countries and sectors. Meanwhile, sukuk outstanding is expected to grow at the average pace of the past five years (around 16% per annum), to USD3SO-360b1n in 2015.

While issuances of longer term sukuk with more than 10-year maturities are on a declining trend, the market has seen an increase in the share of three-year to 10-year sukuk, which would support sukuk outstanding for several more years. On a macro basis, suloik issuances will be supported by the on-going recovery in the global economy, with firmer global growth forecasted at 18% next yea an uptrend compared to 3.3% growth in 2013 and 2014 estimates.Underpinning this growth is robust domestic demand in emerging economies, including in Asia Pacific and the Middle East, amid stronger global trade activity (2014E: 37%; 2015F: 5%). Nevertheless, financial market sentiment remains vulnerable to exogenous events such as geopolitical crises, especially in the Middle East and Russia; as well as shocks in oil prices. Another key concern for investors will be timing of the unwinding of easy monetary policies in the advanced economies, especially the Federal Reserve’s quantitative easing programme. In the past, announcements on the Fed taper had led to volatility in financial market yields, especially in emerging economies. Moving forward, an important supporting factor for sukuk issuances are the major infrastructure needs in the CCC, South Asia, South East Asia and Africa. Notably, the IMF highlighted in its most recent economic outlook that the timing for infrastructure investments is optimal at the moment, due to relatively low borrowing costs globally, amid significant infrastructure bottlenecks in emerging economies. Amongst key sukuk jurisdictions, Malaysia is on the last leg of its Economic Transformation Programme (ETP), and is expected to accelerate spending plans to meet the various economic and socio-economic targets by 2020

SUKUK HAS PLAYED a pivotal role in infrastructure financing and has been utilised for both public and private projects. Between 2001 and 1H2014, a total of U5D95.lbln worth of infrastructure sukuk have been issued by more than 10 different countries. The market for infrastructure sukuk has generally been dominated by issuance from Malaysia, followed by Saudi Arabia and the UAE. From 2001 till 1H2014, Malaysian-domiciled infrastructure sukuk accounted for 652% of all infrastructure sukuk  issuances followed by Saudi Arabia (22.9%) and the UAE (10.4%). Other notable countries that have issued infrastructure sukuk include Indonesia, Pakistan, Kuwait and Brunei.

By infrastructure sub-sector, issuances from Malaysia were mainly by the power and utilities, telecommunications, transport, construction and real estate sector. Meanwhile, Saudi Arabia issued sukuk for power and utilities, real estate and telecommunications. In the medium-term, CCC infrastructure and real estate projects are forecasted to value almost USD3tln, including sectors such as power and utilities and transport. In the event of a prolonged period of weak oil prices, some of these projects may face delays; but overall, most projects are expected to continue given the regions immediate infrastructure needs.Apart from domestic infrastructure needs, Saudi Arabia is also expected to invest in oil and gas and petrochemicals projects, reflecting the importance of the industry to the economy. In the UAE, key catalysts for significant infrastructure spending are the World Expo 2020 and the recovery in the real estate market. Construction at the Expo 2020 site alone is expected to cost between USD2bln to Property prices are now trending upwards and attracting investors’ demand. Elsewhere, recently released its 2015-2020 plans, which is expected to spur more public-private partnerships in the In 2015, the private sector is also anticipated to issue more sukuk, in particular the financial services sector. Islam je financial institutions (IFIs) globally are working towards full- compliance with Basel III; in this regard, recent suick issuances by IFIs in the CCC and Malaysia suest that Basel Ill-compliant sukukare a viable mechanism to meet the enhanced capital adequacy and liquidity standards.

Overall, Basel III suick represent a milestone development in Shari’a compliant financial engineering which enables Islamic financial institutions to progress alongside their conventional counterparts. The rising popularity of sukuks  amongst sovereigns and large corporates has also witnessed significant increase in deal sizes, and this trend is likely to continue. Landmark sukuk issued back in the 1990s and early2000s were well below the USDlbln mark For example, the corporate sulckljarah issued in Malaysia amounted to USDl 5Omln, while the first sovereign sukuk ljarah raised USD 600mln Today, issuance s of around USD1b1n are fairly common. In 11M14 alone, there were 15 issuances of USD1b1n or above’The issuers ranged from multilateral agencies, central banks, governments, a financial institution and power and utilities providers. Overall, 442% of total sukuk issuance volume comprised of individuals deals valued at more than USD1b1n. Notably, a significant share of these deals are issued in CCC countries, while Malaysia, the best sukuk market, tends to record deals of smaller sizes or with many tranches. Smaller sukuk of less than USD100m1n accounted for just 11% of total issuances in the 11M14.

In line with recent trends, the sukuk market will continue to attract cross-border and foreign currency transactions, reflecting in part the attractiveness of leading sukuk domiciles such as Malaysia, as well as the ease of conducting transactions in selected stock exchanges In addition, the demand for USD denominated sukuk looks set to stay, given the demand for USD-instruments globally and ample liquidity of the currency.  Within the CCC, as well as Indonesia and Turkey, it is likely that the USD will remain the foreign currency of choice. Elsewhere, cross—border listings are expected to increase, driven by issuers’ preference for exchanges which offer ample liquidity and business-friendly environments. To date, the major European stock exchanges in London, Ireland and Luxembourg are the leading destinations for sukuk issuances from a wide range of issuers across the globe; these exchanges, supported by high volume and liquidity,will continue to be an important destination for sukuk. Meanwhile, offshore financial centres such as Cayman Islands, Jersey and Guernsey are also widely preferred for listings, particularly by the CCC countries. Looking ahead, major Islamic finance exchanges such as Bursa Malaysia and NASDAQ Dubai will become more prominent, supported mainly by large domestic issuances. Overall, the rising popularity of foreign-currency sukuk and cross border transactions is a testament to the increasing depth and breadth of the global sukuk market.
Looking ahead, the continued strong growth of the sukuk market is expected sustain in 2Ol5.’The sukuk pipeline suggest a healthy mix of sovereign and corporate sukuk in the 1H2015. Against the backdrop of a more entrenched economic recovery and growing interest in sukuk by an increasing number of countries and issuers, the sukuk  issuances are expected to exceed the USDllObln for the fourth year in a row. Sukuk outstanding is also expected to increase to almost USD3SObln.

As in the past, the sukuk  market will be driven by sovereign issuers and infrastructure spending, reflecting mainly the large financing needs of these issuers/projects. Nevertheless, stronger domestic demand in both Asia and the CCC will spur more issuances from services—related sectors (such as F&B and retail), healthcare and education; as seen in 2014.

The key challenges for the market include the decline in oil prices,which is an important source of income for the CCC economies; as well as the potential for disorderly exit from easy monetary policies in the advanced economies. Despite these risks, the sukuk market remains supported by structural factors which will continue to bolster its growth and depth in the medium-term

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