More Non-Muslim Government Sukuk Issuers To Hit Market

Dubai: As the hard currency denominated sukuk issuance gains momentum, analysts expect more new Islamic and non-Islamic sovereign issuers to enter the market.

Since 2001, governments of South Africa and most recently Sharjah, at least eight other governments – Luxembourg, Morocco, Tunisia, Egypt, Jordan, Oman, Bangladesh and Kenya have expressed firm intentions and are likely to issue sukuk in the next two years.

United Kingdom issued its inaugural sukuk, while Hong Kong and South Africa are expected to conclude sales in September 2014. All three are major non-Islamic countries and indicate a significant change in the potential size, depth and liquidity of this market.

Various other countries such as Australia, the Philippines, South Korea, Russia and Azerbaijan have shown moderate interest in the sector.

“We expect the share of international issuance to increase, attracting more global investors and improving the depth and breadth of this relatively new sector. The dollar-pegged economies in the Gulf will drive an increasing supply of cross-border, hard currency sukuk issuance. Demand from global investors will grow as they become more comfortable with this asset class and it will support their search for yield and portfolio diversification,” said Khalid Howladar, Moody’s Global Head for Islamic Finance.

Although new sovereign issuers are expected to enter the market in the near future, Moody’s analysts expect the sovereign volumes to remain concentrated in regions that have a natural cultural affinity with the sector, such as in Malaysia and in the more established GCC markets, where estimates of the size of Islamic banking asset range from 10 per cent of the total banking assets in the UAE to 50 per cent in Saudi Arabia.

Debt-to-GDP ratio

Turkey and Indonesia have large fiscal financing needs and are also highly supportive of the sector and have taken steps to promote it through specific legislation and numerous benchmark sovereign issuances.

Saudi Arabia’s sukuk market continues to grow although volumes are driven more by quasi-sovereign issuers. It has a very low debt-to-GDP ratio of 3 per cent and substantial spending plans, leaving ample headroom for more issuance.

The government of Malaysia remains the largest issuer with close to 59 per cent of total sovereign sukuk outstanding as of July 2014, even as the number of sovereigns issuing sukuk continues to grow. Most of this issuance has been in the country’s domestic market and denominated in ringgit. Malaysia‘s government is also the most reliant on sukuk for its financing.  Around 35 per cent of its outstanding debt is of sukuk form.

Indonesia has significant long-term potential to develop a sizable domestic sukuk market but has not historically undertaken the coordinated policy initiatives necessary to stimulate corporate or banking growth in the sector. Total issuance to date is around $20 billion, with the majority being sovereign and less than $1 billion issued from the corporate sector. As such, Indonesia’s sukuk market remains relatively shallow and underdeveloped compared to that of neighbouring Malaysia.

Originally published on www.zawya.com