Aimed at financing stimulus packages and alleviating the economic impact of COVID-19, total sukuk issuances worldwide reached $172 billion in 2020 compared to $169 bn a year earlier, according to global data provider Refinitiv.
However, sharia-compliant bonds issuances slowed significantly during Q4 in the GCC as governments, and particularly Saudi Arabia, reduced their borrowing, Refinitiv said.
GCC governments collectively issued nearly $106 bn in debt in 2020, of which $41 bn came from sovereign sukuk, a record.
Sukuk issuance from Saudi Arabia totaled $22.7 bn in 2020, increasing 25% from 2019. However, the Saudi government wrapped up its domestic borrowing by the end of Q3 2020, securing an excess of $0.7 bn to cover financing needs till the end of the year.
Sukuk momentum in 2021
Sukuk issuances are expected to pick up further momentum during 2021, with an eye on some active and first-time issuers tapping the sukuk market.
According to Refinitiv, the recent reconciliation with Qatar has reopened the country’s access to its major sukuk investor base – GCC-based Islamic financial institutions.
Issuance from Qatar nearly halved to $2.4 bn in 2020 from $5 bn in 2019.
The Egyptian government’s debut sukuk is on the horizon after Egypt’s cabinet approved the Sovereign Sukuk Act in November 2020.
The country’s Financial Regulatory Authority (FRA) revealed its plan to issue two sovereign sukuk offerings in early 2021.
Sukuk projections 2021
S&P Global Ratings forecasts total sukuk issuance of about $140 bn–$155 bn this year, thanks to a recovery in issuance in Malaysia, Indonesia, and the Gulf Cooperation Council (GCC) countries. This compares with a drop in issuance to around $140 bn in 2020 from some $167 bn a year earlier.
Assumptions backing this are GDP growth recovery in core Islamic finance countries and price of oil stabilization at about $50 per barrel in 2021.
Downside risks include a persistent COVID-19 pandemic that may harm the countries’ fragile economic recovery. The forecasted average growth in GDP for these countries in 2021 is 4.6%.
S&P Global Ratings also foresees an increase in issuance by corporates whose activity was muted in 2020 as they held on to cash and deferred capital expenditure because of the pandemic.
The number of defaults or restructurings among sukuk issuers with low credit quality will likely increase in 2021 as regulatory forbearance measures come to an end.
“We see pressure on real estate developers in particular, given the drop in real estate prices in the GCC and the building risks in the commercial real estate sector,” said S&P Global Ratings.
Early notices of sukuk issuances
Riyad Bank plans to establish a domestic SAR-denominated sukuk issuance program of up to $2.67 bn, the bank said in a bourse filing on January 19, 2021.
The program’s purpose is to issue and offer senior and/or subordinated sukuk, including the issuance of Tier 2 capital-eligible sukuk in one or more tranches, or through one issuance, or a series of issuances by way of private placement in Saudi.
The purpose of the program is to strengthen the bank’s capital base, as well as support its financial and strategic needs.
The Indonesian government announced plans to increase its sukuk issuance to over $25 bn in sukuk in 2021, accounting for 30% of its total sovereign debt issuance. The issuance will include a global Wakala sukuk, during the first half of the year, worth at least $2.5 bn.
The Indonesian government also plans to issue sukuk worth $1.96 bn this year to finance the country’s costly infrastructure projects and spur economic growth, a Finance Ministry official has announced.
It will use the proceeds to finance 870 development projects.
The government’s sukuk issuance plan is part of a broader effort to raise around $784.5 bn to help revive the coronavirus-battered economy and to finance the fiscal deficit, which is expected to reach 5.7% of gross domestic product (GDP) this year.
Finally, Pakistan plans to issue a U.S. dollar-denominated bond and sukuk before March, according to an official at the country’s ministry of finance.
“We are in the process of completing our internal procedures and working with our advisors,” the official told Salaam Gateway. “We hope to issue both the bonds and sukuk sometime before March.”
The new issuance will come under the government’s Medium-Term Note (MTN) programs, covering both Eurobonds and international sukuk.
If issued, a hard currency bond and sukuk issue would be Pakistan’s first since 2017 when it sold $2.5 bn of bonds and sukuk.
Pakistan is rated B3 by Moody’s and B- by both S&P Global Ratings and Fitch.