As the coronavirus keeps spreading and throwing the global economy into turmoil, it cannot be emphasised enough that the Islamic financial industry will certainly not be exempt from the trouble. The economic disruption caused by the tiny, invisible but nonetheless insidious infectious agent is massive and unprecedented, with capital markets nosediving, global supply chains shattering and economic conditions continuously deteriorating. Studies forecast collateral damage of about 25 million lost jobs, and experts say it is clearly not enough for the global economy to stick the crisis out, but it would need a complete restart after the virus eventually subsides in order to build a new, strong foundation and create resilience so that such a huge disruption won’t happen again.
“The picture for economic growth in 2020 looks bleak,“ Bandar Hajjar, president of Islamic Development Bank Group (IsDB), wrote in an open letter last week.
“The number of IsDB member countries affected by Covid-19 has reached 45 out of 57. We have already received requests for financial support from more than 20 member countries,” he added.
That said, the possibility is high that the dire situation will result in an overall slower growth or even stagnation of the Islamic finance industry this year and will have a particular effect on debt markets, namely on sukuk.
According to Moody’s Investor Service, sovereign sukuk issuance will show only modest growth this year owing to the economic impact of coronavirus pandemic. While governments of oil-producing countries in the Middle East are looking to raise more money to meet financing requirements in the wake of lower oil prices caused by dampened demand from a near-collapse of the aviation industry and the global travel market, capital markets are cautious to pour money in new debt issuances.
In Malaysia, the world’s largest sukuk issuer, new issuances are expected to stall or even decrease due to subdued economic growth caused by the virus crisis.
Experts say that, globally, there continues to be a considerable downside risk as it was totally unclear how the virus outbreak will develop further and uncertainties remain as to its intensity and whether it will turn unmanageable, which certainly would be the worst case for the global economy and the capital and debt markets.
According to Bashar Al Natoor, global head of Islamic finance at rating agency Fitch Ratings, the coronavirus pandemic was already negatively impacting primary sukuk market activity and “significantly increasing volatility, putting sukuk markets on almost a standstill.”
Natoor said that many issuing countries face “an unprecedented combination of challenges” which had resulted in changes in liquidity and investor sentiment.
“These developments are currently negatively impacting new sukuk issuances as the increasing volatility has triggered many issuers and investors to withdraw from markets,” he was quoted as saying by The Malaysian Reserve.
As a result, a number of banks in the Middle East and Southeast Asia have postponed planned sukuk issuances from the first half of this year, and others say they were closely monitoring the situation and would probably follow suit.
With regards to corporate issuers, airlines are among the hardest hit and many will have to restructure their debt under the current liquidity pressure. For instance, Indonesia’s national carrier Garuda said it was forced to restructure a $500mn-sukuk issued in 2015 and due this June as the airline struggles with liquidity issues as travel demand has evaporated in the wake of the coronavirus pandemic. The price for the sukuk’s units dropped almost 40% since end-February, and the carrier now has proposed that sukuk holders would receive a participation fee of just 0.6% of the outstanding principal amount of their certificates. Garuda also delayed plans to raise $900mn to refinance its debts through a new global sukuk or other financing options. Financial experts say the coronavirus-induced Garuda sukuk restructuring has the dimension of the Dana Gas’s sukuk debacle two years ago which has shocked the sukuk world.
Likewise, debt-laden commodities producers, shipping firms and energy companies indebted in sukuk will quickly have to address liquidity issues amid waves of selling by concerned bondholders.
However, in case the coronavirus situation mitigates and the world returns to more or less normal probably in the third quarter this year, things would improve quickly, analysts say. According to Moody’s, global long-term sovereign sukuk issuance could rise by 6% to $75bn in 2020 as governments look to raise more money to meet financing requirements for recovery after the virus crisis. And after investor confidence incrementally returns, analysts even expect an “epic rebound” on the capital and debt markets globally.
