Lower local currency issuances in key Islamic finance nations have led to a nearly 15 percent decline in global sukuk issuance during the first half of 2025, falling to $101.3 billion from $119.0 billion at midyear 2024. S&P Global Ratings anticipates that local currency issuance will continue to be subdued, reflecting the liquidity conditions in certain core markets and reduced financing needs due to strong fiscal performance in other regions. In contrast, foreign currency issuance saw an increase, rising to $41.4 billion from $38.0 billion. Consequently, S&P maintain its expectation for foreign currency-denominated issuances to reach between $70 billion and $80 billion in 2025.
Foreign currency-denominated issuances increased by 9 percent in the first half of 2025. This was underpinned by strong issuances in the UAE, Bahrain, and Kuwait, while in Saudi Arabia S&P observed a small decline in issuance. This increase is despite the volatility in international capital markets that followed the announcement of tariffs by the U.S. government and slower-than-initially-expected monetary easing. Significant financing needs in core Islamic finance countries supported sukuk issuances, as well as lower oil prices and fiscal deficits.
Under S&P base-case scenario, the agency continue to exclude the possibility of a prolonged, full-scale regional war in the Middle East. Instead, the report notes that the conflict may lead to a sustained blockade of trade routes, maritime harassment, cyber or terrorist attacks, or international involvement, including the U.S.
Oil prices to average $60 in 2025
“We assume oil prices will average $60 for the remainder of 2025 and $65 for 2026, and that the market’s oversupply will continue to outweigh demand from 2025. We expect sukuk to contribute to the financing of core Islamic finance countries that rely heavily on oil revenue,” S&P stated.
Additionally, the market is likely to benefit from the Federal Reserve (the Fed) reducing its interest rates by 50 basis points in the last quarter of 2025. Following the delay in implementing the Accounting and Auditing Organization for Islamic Financial Institutions’ (AAOIFI’s) Standard 62, along with the uncertainty surrounding its potential impact on the sukuk market once finalized, the urgency to issue prior to the standard’s adoption may diminish, as both issuers and investors no longer view the disruption as imminent.
Read more: Saudi Arabia closes June 2025 issuance of sukuk program at $627.8 million
Saudi Arabia’s banks drive Vision 2030 sukuk issuances
During the first half of the year, issuers capitalized on any available market opportunities. In Saudi Arabia, where issuers accounted for 38.9 percent of market volume, numerous issuances emerged from banks aiming to finance the government’s Vision 2030 initiatives. Similarly, the UAE experienced a notable surge in issuance volume, with banks and corporates accessing the market to fund growth amidst a still-supportive economy. In Malaysia, the International Islamic Liquidity Management Corp. continued to tap the market, providing the industry with much-needed liquidity management instruments and contributing to the bulk of the country’s foreign currency issuances. S&P expects performance in the second half of the year to depend on the evolving geopolitical situation in the Middle East.
“However, since we don’t expect a full-scale regional war, we think the resilient foreign currency issuance trends observed in the first half will continue. It will also be supported by the Fed’s expected reduction in interest rates. Therefore, we maintained our forecasts for foreign currency-denominated issuances to reach about $70 billion-$80 billion for the full year in 2025,” the agency clarified.
Fiscal consolidation effects
Local currency-denominated issuances experienced a sharp decline in the first half of 2025, falling to $59.8 billion at midyear 2025 compared to $81.0 billion the previous year. This decrease was not directly linked to U.S. tariffs and the subsequent volatility in global capital markets, nor was it solely a result of the escalating geopolitical risks in the Middle East. Instead, it stemmed from diminished local currency issuances in several key Islamic finance countries, particularly Malaysia, Saudi Arabia, Qatar, and the United Arab Emirates (UAE).
Saudi Arabia, where banks’ liquidity is instead being channeled into financing Vision 2030. The drop was mainly underpinned by lower issuances from the government.
“We have also seen a lower volume of issuance in Malaysia, where the central bank not only reduced its issuances but also eased the reserve requirements to inject additional liquidity in the system,” the report emphasized.
“We think Bank Negara may continue to moderate its issuances as it shifts to a more accommodative stance, including ongoing support for liquidity conditions. The consolidation of the government’s fiscal position may also reduce sukuk issuance in Malaysia. The Malaysian government has reduced its fiscal deficit meaningfully over the past three years, and borrowing needs are now likely to remain lower than during the 2021-2023 period, even as the pace of consolidation slows. We expect this trend to continue in the second half of the year, limiting the issuance volume of local currency sukuk compared with last year,” the paper concluded.
