The rating agency Standard & Poor’s is forecasting a drop of up to 20 per cent in sukuk issuances this year as lower oil prices dampen appetite for spending in the Arabian Gulf and Malaysia.
The absence of the Malaysian central bank in the sukuk market is also weighing on sukuk issuance. New sukuk dropped by nearly half last year from the previous year.
Sukuk issues are foreseen dropping to between US$50 billion and $55bn this year from $63.5bn last year, according to S&P. In 2014, about $116.4bn of sukuk was issued globally.
“We think that if oil prices remain weak, some governments of oil-exporting countries in the GCC and Malaysia may have no other choice than to reduce investment spending, resulting in lower financing needs and potentially lower issuances,” wrote Mohamed Damak, a Dubai based credit analyst at S&P.
On the flip side, Mr Damak wrote that sukuk issuances may be helped if sanctions are lifted on Iran and that government spends more money on infrastructure. European investors searching for higher yields amid low interest rates back home could give a bump to sukuk, the rating agency said.
Demand for sukuk has been on the rise in the Middle East in recent years as regional companies seek to expand their investor base in countries such as Malaysia, the world’s biggest issuer of sukuk.
In the UAE, Islamic banks, including Dubai-based Noor and Abu Dhabi Islamic, have been growing at high rates amid a boom in sukuk financing.
Bank Negara Malaysia, the Malaysian central bank, is one of the world’s largest issuers of sukuk. It reportedly stopped issuing sukuk last year because it was concerned that its sukuk issues were being bought by investors other than Malaysian Islamic banks, its intended audience. Instead, the central bank switched to instruments other than sukuk to meet the short-term cash needs.
Meanwhile, in the UAE, Sharjah looks like it is getting the ball rolling on regional sukuk issues. According to Reuters, the emirate is planning to raise funds through a dollar-denominated sukuk in what might be the first sovereign sukuk issuance in the Arabian Gulf this year. The issue is expected to be in the range of $500 million.
mkassem@thenational.ae
Follow The National's Business section on Twitter