It is hard to deny that the Sukuk market has faced a slowdown this year despite a much expected strong year for 2015. Nevertheless, the Sukuk market this year has built upon the impressive market development seen in 2014 and observed several notable transactions which can serve as milestones for the years to come. Although the Sukuk market climate for the year 2016 is still uncertain, HITESH ASARPOTA expects that the market will gain traction again on the back of the strong pipeline and the still prevailing demand-supply gap of Sukuk in the market.
The global Sukuk issue volume in 2015 is US$28.6 billion (as at the 25th November 2015) and unlikely to reach 2014’s level of US$43.5 billion by the end of the year. Not only has the Sukuk issuance volume declined compared to the previous few years, the year 2015 has not met with the same kind of landmark transactions as in 2014 where we witnessed highly-anticipated debut sovereign issues from non-Muslim countries such as the UK, Hong Kong, Luxembourg and South Africa as well as maiden issues by Goldman Sachs and the International Finance Facility for Immunisation (IFFIm).
Review of 2015
Having a notable year in 2014 in terms of Sukuk issue volume and successful debut issues, we started off 2015 with robust momentum and a strong pipeline. The first half of 2015 registered a global Sukuk issue size of US$20.5 billion, which was only a 14.1% decline from US$23.8 billion for the same period last year.
Although the second quarter of 2015 maintained a high volume of US$11.1 billion supported by a few large-ticket deals by sovereign issuers such as Malaysia, Indonesia and Hong Kong, the market began to experience the influences of declining oil prices and a widely-held expectation of the US Federal Reserve increasing its benchmark interest rate within this year. Falling oil prices were in particular expected to take a heavy toll on the availability of liquidity and government spending and investment in the Middle East. As a result, the share of global Sukuk issue from the Middle East in the second quarter of 2015 significantly dropped to 24.4% (from 47.2% in the first quarter of 2015 and 56.9% in the second quarter of 2014) while Southeast Asia’s share soured to 65.5%.
The third quarter of 2015 was arguably one of the weakest quarters in recent years. One factor was a long period of market inactivity during the holy month of Ramadan and Eid followed by a summer holiday period. It also continued to be affected by oil prices and Fed rate expectations, coupled with volatile commodity prices and growing concerns over emerging economics, especially China. The quarter ended with an issue volume of US$3.2 billion, out of which Middle East issues and US dollar-denominated issues accounted for a paltry 32.3% (US$1 billion) and 15.5% (US$500 million) respectively. The tone of global markets shifted into positive territory as we entered the fourth quarter of 2015, and the US dollar Sukuk market started to gain momentum, albeit slowly. Despite a steep decline in Malaysian issues and ringgit-denominated issues to historic lows, the total global Sukuk issue size currently stands at US$4.9 billion in the fourth quarter to date as at the 25th November 2015.
Against the backdrop of volatile market conditions unconducive to Sukuk issuances in the latter part of the year, however, the year 2015 saw a few significant transactions which have paved the way for further progress of the Sukuk market. In March 2015, UAE-based airline operator Emirates successfully priced a US$913 million senior unsecured amortizing Sukuk fully backed by the Export Credit Guarantee Department (ECGD) of the UK government. Marking the world’s first ECGD-backed Sukuk, the transaction was a strong testament that the Sukuk investor community was increasingly familiar and comfortable with innovative and complex structures involving numerous stakeholders.
In October, we saw the Arab Petroleum Investments Corporation (APICORP) successfully pricing its debut Sukuk in the international capital markets. As a multilateral development bank established in 1975 by the Organization of Arab Petroleum Exporting Countries, APICORP is a significant addition to the list of supranational issuers giving further depth to the highly-rated Sukuk market. In Southeast Asia, Garuda Indonesia, Indonesia’s national flag carrier, became the long-waited first issuer of US dollar Sukuk by non-sovereign Indonesian entities in May 2015. The unrated US$500 million trade was issued at 6.125% yield on the back of strong feedback from high-quality investors especially from the Middle East, which took 56% of the issue.
In the government and supranational space, such regular issuers as Indonesia, Malaysia, Ras Al Khaimah and the IDB successfully tapped the market. While Hong Kong reinforced its newly-established yet sound Sukuk platform by offering its second US dollar Sukuk on a Wakalah structure, the IFFIm’s comeback proved Sukuk investors’ support for socially responsible investment (SRI) instruments.
Preview of 2016
We forecast that the Sukuk issue volume for the first half of 2016 will recover moderately. Investors are expected to stay cautious about the market climate, and the impact of low oil prices on the regional liquidity and governmental spending and investment plans in the Middle East is not very likely to be reversed immediately even if there is a recovery in oil prices. However, the pipeline for 2016 is strong as the region’s resilient economics continue to require funding and would need to turn to capital markets from tightening bank credit available in the region. The mismatch between Sukuk demand and supply will still be relevant in 2016 given the low issue volume this year.
There are three areas which we identify as potential markets to flourish in 2016 and beyond: SRI Sukuk, securitization and new markets. The IFFIm Sukuk was a strong testament that the Sukuk investor community was ready to embrace SRI, reminding us of the natural match between SRI and ethical principles embedded in Islamic finance. The Sukuk market is on the way to becoming the preferred alternative venue for fundraising by multilateral organizations, development agencies, NGOs and so forth. Securitization Sukuk, which is non-recourse asset-backed Sukuk, is an area expected to gain traction. A wider variety of instruments other than senior unsecured notes are evidently required as Islamic finance markets and economies grow in depth and breadth. In the face of weakened deposit growth, regional Islamic financial institutions will be compelled to consider asset securitization as a means to use their balance sheet more efficiently. Finally, there continues to be a strong interest in Sukuk financing across the world and in 2016, we also anticipate maiden Sukuk issues from new markets that may include Egypt, Morocco and Jordan.
Despite the slowdown in Sukuk issuance in 2015, the outlook for 2016 is promising with market development in the areas of SRI, securitization and new markets. The year 2016 will see the Sukuk market broadening the range of its options to cater to a variety of funding requirements in and outside the traditional Islamic finance markets. We are confident that there will be game-changing transactions which will further reinforce Sukuk as a viable alternative market globally.