By NST Business
KUALA LUMPUR: Sovereign sukuk issuance volume will continue to grow in 2018 as governments look to diversify their financing mix and satisfy the liquidity needs of Islamic retail banks, says Moody’s Investors Service.
Total sukuk issuance will reach around US$95 billion by the end of this year, after more than US$85 billion in 2016, including more than US$50 billion of sukuk issuance by sovereigns.
"Sovereigns have underpinned a recovery in the global sukuk market this year, with their issuance increasing by 50 per cent in the first eight months of 2017," said Christian de Guzman, a Moody's Vice President -- Senior Credit Officer.
In a report, 'Sovereign: Sovereign sukuk issuance gains momentum, with new players entering the market', Moody’s highlighted a number of factors to support issuance.
Despite Malaysia's falling share of sovereign sukuk issuance, it remains the largest sukuk market with an estimated 43 per cent of total sovereign sukuk outstanding in 2016.
High borrowing needs for Gulf Cooperation Council (GCC) sovereigns, said Moody's, will reach around US$148 billion in 2018.
GCC countries drove the market's growth in 2017 with Saudi Arabia raising the lion's share of sukuk during the year to a total of US$17 billion, or 40 per cent of global long-term sovereign sukuk issued in the first eight months of the year.
Countries with large fiscal deficits, such as Oman and Bahrain (negative) - estimated at 11.9 per cent and 13.4 per cent of GDP in 2017 respectively, will also contribute to the market's expansion.
Other factors contributing to higher sovereign sukuk issuance include demand from domestic banks, and product innovation that will help address two fundamental challenges faced by the issuers: the lack of physical assets for structuring sukuk and the prohibition from transferring asset ownership to special purpose vehicles (SPVs) under some jurisdictions.
Narrowing of spreads over conventional bonds will also contribute to sukuk issuance, it added.