KUALA LUMPUR: Global sukuk issuance unlikely to retain strong performance this year due to tighter global liquidity conditions, mounting geopolitical risks and slow progress on the standardisation of Islamic finance products.
These setbacks, according to Standard and Poor Global Ratings (S&P), would continue to hold the market back from its full potential.
“We note slow progress in the standardisation of sukuk products, but greater awareness of the need for increased standardisation.”
Global sukuk issuance in 2017 increased 45.3 per cent to 97.9 billion from US$67.4 billion in 2016, spurred by major issuance of some Gulf Cooperation Council (GCC) countries.
S&P foresees significant financing needs for core Islamic finance countries would remain high.
It expects global liquidity likely to tighten this year citing federal funds rate to increase by 75 basis points.
“Central banks in the GCC countries will probably mirror such an increase due to the peg of their currencies with the US dollar.”
“We think the cost of funding for issuers will rise and that liquidity from developed markets channelled to the sukuk market will reduce or become more expensive.”
S&P said the muted economic growth and declining lending activity shifted banks’ focus from lending to capital market activities as they sought higher yields than for cash and money market instruments.
“The recent resurgence in geopolitical risk in the region might worry regional and international investors.
It noted that geopolitical risk considerations are weighing heavier on some investors, especially the recent sanctions imposed on Qatar by a group of Arab states in June last year.
“This resulted in funding outflows from the country’s banking system that we estimate at US$21 billion as of September 30, 2017.
“We expect these outflows to continue as foreign deposits mature but the pace to slow.”
The boycott, S&P said, changed investors’ perception of the cohesiveness of GCC countries as a block.
“Investors may look unfavourably upon recent shifts in Saudi Arabia’s power structure and societal norms, which could increase the risk of policy mistakes.”
S&P foresees more stringent application of the profit-and-loss-sharing principle in sukuk legal documentation.
“Such development could deprive the market of an important class of investors (fixed-income investors) and ultimately lead to higher pricing.
“For a corporate entity or a sovereign, this trend is likely to reduce the attractiveness of sukuk due to legal complexity and higher costs.”
The ratings agency said retail investment or waqf money could lift sukuk issuance and reduce pricing by boosting demand.
“We observe they (waqf) are generally not after profit maximisation but rather the fulfilment of certain social objectives.”
Source: New Straits Times