KUALA LUMPUR: The global sukuk supply is expected to accelerate this year as issuers seek to refinance maturing debt and fund large budget needs, Fitch Ratings said.
Another contributing factor is the easing of the Gulf Cooperation Council (GCC) investment restrictions following the normalisation of relations between Qatar and its neighbours.
Fitch said innovative and diverse issuances like green, sustainable, transition and hybrid sukuk were likely to continue to attract wider investor demand, backed by supply resilient with momentum to continue into 2021.
"We also expect regulatory drive towards standardisation to continue," it said in a report yesterday.
The ratings agency said sovereigns in key Islamic finance jurisdictions were expected to remain major contributors to overall sukuk volumes as they face nearing maturities of sukuk, bonds and loans, with widening fiscal deficits.
"Issuance from first-time sovereign issuers, financial institutions and corporates are to increase as they face challenging conditions and take advantage of the current lower funding cost."
Sukuk volumes in Qatar are expected to gradually rise after the normalisation of relations between Qatar and its GCC neighbours, and the eventual easing of investment restrictions for Islamic investors based in countries such as Saudi Arabia and United Arab Emirates.
"The reduced political risks would also help boost sukuk investor and issuer confidence and demand," Fitch said.
The proportion of sukuk from issuers with negative outlooks increased sharply from 1.5 per cent in 2019 to 23.4 per cent in 2020, mainly due to Covid-19 related disruptions and low oil prices.
"Sukuk volumes in 2020 were similar to 2019 levels as sukuk issuances with maturities of more than 18 months from the GCC region, Malaysia, Indonesia, Turkey and Pakistan fell slightly by 1.9 per cent year-on-year (YoY) to reach US$41.3 billion in 2020.
"Bond volumes increased by 25.5 per cent YoY due to big-ticket sovereign issuances, while the volume of Fitch-rated sukuk increased by 12.9 per cent YoY to US$118.6 billion at fourth quarter (Q4) of 2020, of which about 33.6 per cent is estimated to mature in 2021-2023."
On the green and sustainable sukuk (GSS), Fitch said a number of issuers across sectors, including sovereigns, supranationals and corporates, had increased sharply by 96.2 per cent YoY to reach US$8.4 billion as at end of Q4 last year, representing 7.1 per cent of the total sukuk portfolio.
"Investor demand is rising including by American, Asian and European investors with many issues oversubscribed multiple times."
The ICE Benchmark Administration had announced a consultation on the cessation of a number of US dollar Libor reference tenures being delayed from December 2021 to June 2023 to give extra time for the transition.
"Sukuk faces extra complexities from the transition due to sharia considerations. However, the US dollar sukuk market is largely unaffected as the bulk is fixed-rate (92 per cent). Most sukuk now include fall-back provisions to adjust to reference rate changes," it added.