We have seen a substantial reduction in capital market activity in 2022 — particularly with regard to Sukuk issuance— despite 2021 forecasts. This has been underpinned by several factors, including the Ukraine–Russia conflict, high oil prices and the rebound from COVID-19 economic implications. The increased market uncertainty instigated by the Ukraine–Russia war has affected investors’ appetite worldwide. Furthermore, the subsequent increase in oil prices has boosted the majority of the GCC’s economies and their respective balance sheets.
With higher vaccination rates and less stringent COVID-19 restrictions, the region has substantially emerged from pandemic pressures, regained consumer confidence and business sentiment.
With regards to Sukuk issuance, while progress has been made in terms of document standardization in the GCC, stronger efforts to integrate Shariah considerations into the IBOR [interbank offered rates] transition are required.
Review of 2022
On the back of the GCC economic boom, rating agencies have upgraded several regional issuers. Although this would have had a large impact on issuers’ risk premia, inflationary burdens and the consequential investors’ risk aversion have offset somehow Sukuk activity at least in the short term.
Throughout 2021 and 2022, an interesting progress on the documentation has been achieved. Although the adoption of AAOIFI standards as per the directive of the UAE’s Higher Shariah Authority has presented some challenges for issuers and other stakeholders for a relatively short period of time, we can further witness the intended standardization in the documentation.
Moreover, other GCC countries are now replicating templates being used in the UAE to capture a wider spectrum of investors. As a result, we foresee less uncertainty with regards to documentation and wider acceptability among Islamic scholars. In 2022, Boubyan Bank updated its existing program documentation by introducing the essential amendments to align with AAOIFI standards, catering to UAE investors and, in turn, ensuring adequate secondary market performance.
New GCC Sukuk entrants in 2022 include Arada, Riyad Bank, Infracorp and the Private Department (after initially withdrawing from a transaction in July 2021).
Fixed benchmarks have been a key common feature in 2022. While the bulk of Sukuk issuances historically has been on a fixed basis, the additional layer of IBOR transition and resulting Shariah implications have made the fixed route the more straightforward choice. We believe that it is only a matter of time before the market reaches a wider consensus regarding the transition on the syndicated financing front and applies these solutions to Sukuk structuring.
The region has not yet seen an extensive number of green/sustainable Sukuk issuances despite the strong conceptual linkages between both avenues. Islamic GCC anchor investors are mostly banks which are still in the process of implementing their own framework and thus remain neutral between investing in sustainable vs. non-sustainable Sukuk.
However, we anticipate that this will change as soon as we see more sovereign sustainable Sukuk issuances in the region driving the whole market toward that direction and mimicking the Indonesian experience. Since 2018, Indonesia has been leading the market with green Sukuk gauging investors’ interest around the world with comfortably oversubscribed deals including the last one issued in 2022 which was the largest-ever green Sukuk printed globally. It is also worth noting that the IsDB has raised EUR1 billion (US$987.51 million) and US$4 billion in the green/sustainable Sukuk format over the past three years.
Preview of 2023
In 2022, numerous issuers shied away from entering the capital markets in an uncertain environment with fears of establishing wider than expected pricing benchmarks; however, they would eventually need to tap the market to refinance their upcoming maturities and to manage their capital expenditures.
African and Central Asian new entrants could be seen in the near future exploring global Sukuk markets. To date, African issuers have been mostly active in domestic markets, achieving comfortable levels of oversubscription. However, in the past few years, there have been discussions about entering the international Sukuk market, following South Africa’s sovereign issuance in 2014 and, more recently, the Maldives’s sovereign issuance in 2021.
This has been bolstered by the efforts of the IsDB and related subsidiaries to support African credits of their member states and this, in turn, has increased investor confidence. Meanwhile, on the back of various planned projects and a number of MoUs signed between Central Asian republics and the GCC, we anticipate further cooperation between the two through accessing the GCC’s Islamic liquidity: legal and regulatory framework preparation for Sukuk issuances is currently taking place in various parts of these jurisdictions.
We anticipate more sustainability-linked Islamic transactions taking advantage of larger investor pockets, supported by identified sustainable projects that serve as structuring assets, and reinforcing links between sustainable and Islamic fronts. Furthermore, exploring green/sustainable project Sukuk could be another avenue that is yet to be tested.
Conclusion
Despite the current market circumstances, we believe that issuers will eventually enter the Sukuk market, driven by their objectives to diversify funding sources and tap into Islamic investors’ liquidity. We anticipate seeing more standardized templates and further endorsement from Islamic scholars globally.
In turn, this would encourage more traditional conventional issuers to explore the Sukuk market, following the lead of key past sovereign issuances, including UK, Hong Kong and South African Sukuk. The further green/sustainable agendas are pushed by GCC governments, the more expansion in green/sustainable Sukuk would be witnessed, absorbing the consequential Islamic investor demand.
Mayamine Al Saadi is the vice-president of Islamic Finance at Natixis. She can be contacted at [email protected].