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After a good year in 2017, the global sukuk market saw a significant drop in its emissions in the first half of 2018, down 15.3% to 44.2 billion dollars against 52.2 billion dollars in the first 2017 semester.
in sukuk denominated in foreign currency was even more pronounced, down 45 percent from the first six months of 2017.
There is no doubt that 2017 has been an outstanding year for the 39, world sukuk broadcast. For example, Saudi issuers raised more than $ 26 billion sukuk in 2017, including an inaugural sukuk of $ 9 billion in April. In comparison, Saudi issuers have raised less than $ 2 billion so far in 2018.
That said, the global and regional macroeconomic climate has changed significantly over the last 18 months, having a knock-on effect on the sukuk market. This is mainly for two main reasons.
First, the global tightening of liquidity conditions is putting downward pressure on the market. We expect the US Federal Reserve to increase its federal funds rate by 50 basis points in the second half of 2018, after two increases in the first half. We believe that the central banks of the GCC countries will reflect this increase because of the pegging of their currencies to the US dollar. After reducing the pace of asset purchases (AP), the European Central Bank will likely reduce its AP program in December 2018 and start raising its interest rates in the third quarter of 2019.
Overall We believe that the liquidity market of sukuk developed markets will shrink and become more expensive. Currently, European and US investors generally account for about a quarter of the investment sukuk in terms of volume. At the same time, weak economic growth and declining lending activities in GCC countries have shifted banks' activities towards financial markets in the hope of achieving higher returns than monetary instruments. and monetary.
The sukuk market this year is the decline in funding requirements in the GCC, given the continued reduction in spending and the stabilization of oil prices over the past 12 months. Overall, we believe that the gross long-term commercial debt issuance of the GCC countries will decrease by 15% in 2018 from 2017. We understand that some countries in the region are on the starting blocks with potential emissions expected for the second half of 2018 However, we expect the overall emissions for 2018 to remain moderate compared to 2017.
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Despite the decline in GCC emissions, Malaysia a positive point for sukuk issuance, since its issuance has increased by 50 percent, represented by government emissions and corporate. In addition, the repeal of the goods and services tax in Malaysia, if it is not offset by sufficient compensation measures, could result in a higher budget deficit and higher financing requirements for the country. . This could further strengthen its sukuk emissions.
The challenges inherent in the sukuk market also continue to hinder its expansion. Standardization bodies have made considerable efforts to advance the standardization of sukuk, but there is still work to be done. Some market participants continue to think that the standardization of the industry is unrealistic and that it would be better to aim for harmonization, or standards that vary from jurisdiction to jurisdiction but which leave some latitude for implementation.
standardization level for the most common structures, while some new instruments still need to be refined. In particular, investors are seeking further clarification on the risks associated with the Murabaha-Mudaraba structure which is widely used in some jurisdictions. We believe that the standardization of cross-border sukuk issuance is not only feasible, but that it will also increase the volume of emissions. It will also enhance the attractiveness of the instrument for issuers by making the issuance process more fluid and faster and will further clarify the underlying risks.
Although we do not attribute the recent drop in sukuk emissions to the GCC at Dana In the case of gas, however, we believe that the underlying issue is in part the suppression of the appetite of investors for GCC sukuk. On a positive note, the litigation has resulted in some changes in the wording of the legal documentation for new sukuk issues, supposedly, to reduce the risk of similar disputes arising. Debt restructuring is a common practice in the global capital market. However, in our opinion, we believe that it is necessary to add rules and clarify the sukuk restructuring and resolution for both issuers and investors. For Islamic capital markets, higher standardization could help establish these rules and clarify things.
Noting the above factors, in addition to the increased regional geopolitical risks of the past 12 months, we are maintaining our forecasts for overall global sukuk volume. $ 70-80 Billion Issued for 2018.
Dr. Mohamed Damak is Global Head of Islamic Finance at S & P Global Ratings, a member of The Gulf Bond and the Sukuk Association
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