The majority of issuance has been from government-related borrowers, says Khalid F. Howladar
Dubai — Sovereigns in the UAE collectively lead international sukuk issuance globally with over $26.8 billion of outstanding as they continue to attract substantial global investor interest, Moody's Investor Service said on Wednesday.
"While direct sovereign borrowing represents only $5.2 billion of the total, the proportion of sukuk versus conventional issuance is rising. And similar to other GCC sovereigns, this trend is likely to continue given the Dubai government's explicit goal to become the centre of the 'Islamic Economy,'" Moody's said.
Khalid F. Howladar, Global Head- Islamic Finance, said the governments of Dubai, Abu Dhabi and most recently Sharjah are active in the international sukuk market, driven by the US dollar currency peg; large financing needs and leverage appetite. "However, given the state dominance of the economy, the majority of issuance has been from government-related borrowers. They display a wide variation in their credit quality and so cannot be considered quasi-sovereign in most cases," he said.
Howladar predicted that sovereigns across the world would issue approximately $30 billion of sukuk in 2014, increasing the size of the sovereign market to around $115 billion by year-end 2014.
"We forecast this strong growth momentum to be sustained as both Islamic and non-Islamic governments increasingly tap or newly enter the market. Moreover, we expect demand and liquidity in the market will improve as the sector attracts more global investors. These instruments achieve the same ratings as the sovereign which is typically the ultimate obligor in such structures," he said.
Moody's noted that volumes of sovereign sukuk have increased significantly over the last three years as governments in Asia, the GCC, Europe and now Africa seek to tap increased demand for Shari'ah-compliant financial assets and further support their domestic policy goals for Islamic finance.
According to Moody's, 2014 has become a landmark year for the sector: The UK (issued its inaugural sukuk, while Hong Kong and South Africa are expected to conclude sales in September 2014. All three are major non-Islamic countries and indicate a significant change in the potential size, depth and liquidity of this market. "We estimate that total sovereign outstanding accounts for around 36 per cent of the $296 billion of outstanding sukuk as of July 2014.3."
Moody's expects sovereign sukuk issuance to exceed 2013 levels to reach around $30 billion by year-end 2014, and continues to expand in the number of sukuk-issuing governments into 2015. "Malaysia and more recently Indonesia have been driving the growth in sovereign sukuk with sales in their domestic markets; together they account for around two-thirds of the total (domestic and international) sovereign issuance as of July 2014.
Factors driving sukuk growth include global investors' growing comfort with relatively complex Islamic instruments; increasing financing needs and leverage appetites from some sukuk-issuing countries; the desire for stronger investment links with the faster growing economies in the Gulf and Asia, and the increasing pools of available Islamic capital. The aspiration of existing capital market hubs to ensure they get a share of the rapidly expanding Islamic financial services industry; and increasing efforts by the governments of Muslim countries to support Islamic banking and finance in line with the cultural and religious affinity of their populations, Moody's said.
The last three years have seen the global sukuk market double, with a CAGR (compound annual growth rate) of 30 per cent for the previous 10 years. "The stock of sukuk outstanding almost quadrupled during that period as annual issuance rose sharply from less than $32 billion in 2010 to a record $83 billion at year-end 2012, commensurate with capital flows into emerging markets."
Concurrently, the sovereign sukuk market has grown strongly over the last three years, with annual issuance rising sharply from less than $15 billion in 2010 to $33 billion and $23 billion in 2012 and 2013, respectively. Overall sovereign issuance increased at a CAGR of 30 per cent from $1.7 billion in 2003, it said. Sovereign sukuk outstanding now accounts for around 36 per cent of the $296 billion outstanding global sukuk market as of July 2014, it said.