Total sukuk issuances declined to $74.5 billion in the first half of 2022 compared to $93.3 billion during the same period in 2021, in both local and foreign currencies, according to Standard & Poor’s (S&P) credit ratings.
In a note, the agency expressed its belief that “sukuk issuance volumes will decrease in 2022 due to a decrease in global and regional liquidity, an increase in liquidity costs, an increase in complexity ,and a decrease in the financing needs of issuers in some core Islamic finance countries, due to the rise in oil prices, which leads to a market impediment. Cautious growth in corporate entities’ capital spending supports our view.”
In the first half of 2022, sukuk issuances totaled $74.5 billion, compared to $93.3 billion in the same period the previous year. Most of the core Islamic finance countries saw a decline, with only a few exceptions – such as Turkey, Bahrain and the United Arab Emirates.
S&P lowered its forecast for sukuk issuance for 2022 to about $130 billion from its initial forecast of $145 billion and $150 billion, and sees more risks rising.
Three factors explain this negative trend
1- More expensive global liquidity: Historically high inflation has prompted major central banks to change their policy stance and accelerate interest rate increases, which has reduced global liquidity and made it more expensive.
Investors’ aversion to risk has also increased, with key sectors of the capital markets experiencing significantly less activity in the first half of 2022 compared to 2021. The sukuk market, as a component of the global capital market, is not immune to global trends.
2- Decreased financing needs of exporters: The rise in oil prices since 2021 has strengthened the balance sheets of many issuers in the main Islamic finance countries. So, the agency was not surprised by the drop in issuance in the first half of 2022. However, in Saudi Arabia, it has noticed an increase in local currency issuance volumes, as the government aims to develop the local capital market. It also noted the continued caution on the part of companies regarding their capital spending plans.
The scars of the pandemic and uncertainty related to the financing environment have led many to rein in growth investments, turn to banks for financing, or begin deleveraging.
3- Complexity remains an issue: Issuers are increasingly realizing that sukuk is more complex and time consuming than traditional bonds, although some players are taking the sukuk route because they expect to diversify their investor base. The good news, the agency said, is that the market appears to have overcome the difficulties related to the implementation of AAOIFI Shari’a Standard 59 (AAOIFI). However, if Sharia scholars push for further weakening of legal documentation, and sukuk instruments lose their fixed income properties with the addition of significant risks compared to bonds, the attractiveness of the sukuk and the market prospects are likely to decline, according to S&P.
According to S&P, transactions of sustainability-branded sukuk, from green to social, that have been brought to market, have risen over the past six months, and it expects to see higher volumes as issuers meet investor demands.
There are two main opportunities for the issuance of sustainability sukuk. The first is that many Islamic finance countries are developing and implementing strategies to transition to green economies, and this may entail future growth potentials for green sukuk issuances. Second, the social aspects of Islamic finance remain attractive. “This is especially important with the economic effects of the pandemic and the Russian-Ukrainian conflict continuing to manifest itself in the form of rising inflation and unemployment, especially in countries with financial constraints.