With the low-interest rates and great liquidity, the economy of GCC, Malaysia and Indonesia are expected to recover soon which in turn will spur the global sukuk market to rise with the value of total issuances projected to touch $140 billion to $155 billion in the next 12 months, S&P Global Ratings.
“We expect GDP growth in the core Islamic finance countries like the GCC countries, Malaysia, Indonesia, and Turkey to recover from a sharp recession in 2020. We also assume that the price of oil will stabilize at about $50 per barrel in 2021,” the rating agency said.
Even though these factors signal a strong performance by the sukuk market in 2021 than last year, the downside risks for the core Islamic finance countries remain significant, according to Mohamed Damak, the S&P primary credit analyst.
The most significant risk is whether the COVID-19 can be controlled, even if a vaccine is widely available by mid-year. Until then, the main threat is that further waves of coronavirus and the essential measures to curb the pandemic may harm the countries’ slow economic recovery and it could affect the nations directly or indirectly through lower commodity prices, exports, and capital flows.
The number of defaults or restructurings among sukuk issuers with low credit quality is likely to rise in 2021 as regulatory forbearance measures come to an end. “This will test the robustness of the legal documents used for sukuk issuances. However, if investors are able to get clarity on their financial recourse mechanisms because of these events, this will probably outweigh the negative impact on market sentiment,” the agency added.
In the coming 12-18 months, the unified global legal and regulatory framework for Islamic finance that the Dubai Islamic Economy Development Center (DIEDC) and its partners are developing will make some notable signs of progress.
“We believe that some sovereigns in the core Islamic finance countries will tap the sukuk market more aggressively in 2021. We also foresee an increase in issuance by corporates. Their activity was muted in 2020 as they held on to cash and deferred capital expenditure (capex) because of the pandemic. They are likely to execute some of this capex in 2021, thereby necessitating access to capital markets,” S&P said.
In 2021, $65 billion of sukuk will mature and a significant amount of this sum possibly will be refinanced on the sukuk market itself, the rating agency said.
Last year, GCC governments have issued $47.5 billion in bonds with $35.4 billion during the first half of 2020. Sukuks issued by the governments stood at $28.7 billion and were almost equally split during the first half the second half of the year. In 2020, the pandemic has created almost 48 sovereign downgrades and 13 upgrades by the three rating agencies this year and numerous corporate downgrades globally.
“With interest rates at one of the lowest levels, the cost of funding has not been significantly affected. In terms of rating action in the GCC, Bahrain, Kuwait, Oman and Saudi Arabia witnessed downgrades by either one or more of the three rating agencies, especially around the peak of the pandemic,” says Asset management company, Kamco.