GCC issuers are waiting for the “best launch window” for sukuk issuance, S&P Global has said in a report.
Issuance of sukuk denominated in foreign currency was up about 9% in the first half (H1) of 2023, thanks to Saudi Arabia and a few new issuers.
S&P now anticipates further issuance this year, since some Gulf issuers are already prepared, just waiting for the best launch window.
S&P now forecast global issuance will total $160bn to $170bn this year, which is higher than its initial estimate of $150bn, but still slightly below the figure in 2022 as local currency sukuk issuance declines.
In the first half of this year, total issuance was down by 17.5% to $83.2bn compared with $100.7bn in the same period last year.
“We continue to expect muted issuance activity overall. We have revised upward our estimate of sukuk issuance to $174.1bn from $155.8bn in 2022 by better capturing the volume of local currency-denominated issuances.
“However, issuance volumes are still lower than in 2021. Year on year, the market saw a drop of almost 25% in the first half of 2023, primarily due to lower issuance by the Saudi Arabian government. We think liquidity constraints in the Saudi banking system in the first half of the year was the main reason for this, since it implies subdued local demand.
“We saw a marginal decline in the UAE and also in Turkey, where we think this related more to the environment amid the legislative and presidential election. In the UAE, we note that the federal authorities issued their first local currency-denominated sukuk during the period.
“We expect to see more such issuance in the next few years as the UAE authorities continue efforts to develop the local capital market.”
Despite less supportive market conditions, S&P saw foreign currency-denominated sukuk increase by about 9% in the first half of this year. This stemmed from sovereign and government-related entities, as well as from banks tapping the sukuk market to ease liquidity pressure in Saudi Arabia.
S&P also saw a couple of new issuers reach the finish line. Egypt tapped the sukuk market for the first time in a transaction that was priced in a similar manner to conventional bonds.
US-based Air Lease Corp also tapped the market during this period, using some of its leased aircrafts as underlying assets.
“We expect to see more traction in the foreign currency sukuk market in the second half of 2023. Many issuers in the Gulf are on the lookout for opportunities the market may have to offer. They are also seeking to benefit from the current rates situation, under the assumption that central banks are not yet done with inflation and further rate hikes may be on the horizon,” S&P added.
