PETALING JAYA: Fitch Ratings expects sukuk issuance to be slow in the third quarter of 2024 (3Q24) due to summer holidays, before picking up pace in 4Q24 driven by refinancing goals, funding diversification efforts, budget deficit management, and support for government development plans.
According to the rating agency, many Gulf Cooperation Council countries and Turkiye have ongoing funding needs.
They will be supported by lower funding costs, with Fitch anticipating the US Federal Reserve will cut rates in 3Q24 to 5% by year-end and 3.75% by the end of 2025, from the current 5.5%.
It added the expected lower oil prices could also drive sukuk issuance.
Fitch expected oil prices to average at US$80 per barrel (bbl) for 2024 and heading towards US$70/bbl by the end of 2025.
“A few markets, such as Qatar and Oman, are deleveraging amid government repayments, and Indonesia and Malaysia are exhibiting fiscal restraint with slower issuances,” it noted.
Fitch said Islamic banks would continue to diversify into sukuk even though deposits will remain their key funding source.
“Corporates will likely continue relying on bank funding. However, government initiatives to develop the debt capital market and funding diversification efforts could drive sukuk,” Fitch said.
As of the end of 2Q24, global outstanding sukuk stood at about US$888bil, marking a 10.2% year-on-year increase.
US dollar sukuk issuance fell by 20.3% quarter-on-quarter in 2Q24 in core markets as expected, while bond issuance fell further by 27%.
In the first half of 2024 (1H24), Fitch said sukuk had a sizeable debt capital market issuance share in Malaysia (62%), Saudi Arabia (61%), Indonesia (31%), Oman (23%), Bahrain (20%), the United Arab Emirates (18%), and Turkiye (8%), in all currencies, with the balance in bonds.
Fitch also noted that environmental, social and governance sukuk, which are issued for sustainable projects, had an outstanding amount of US$43.1bil.
The rating agency observed a rise in emerging markets, where sukuk constituted above 10% of all emerging-market US dollar debt issued in 1H24, against 5% in 2017 and 15% in 2023, excluding China.
It said this showcased emerging markets’ growing maturity and it would likely expand over the next few years.
Fitch rates about US$184bil of total sukuk outstanding, which represents more than 70% of all US dollar sukuk globally.
Of this amount, 81% is investment-grade.
In 1H24, there were no defaults among Fitch-rated sukuk.
Additionally, 7% of sukuk issuers had a “positive outlook”, up from 3.6% in 2023, while 91% maintained a “stable outlook”, compared with 93.6% in 2023.
On an another note, the rating firm said from end-May 2024, in the JP Morgan Global IG sukuk index, only sukuk deemed materially compliant with the Accounting and Auditing Organisation for Islamic Financial Institutions syariah standards and guidelines by the higher syariah authority of the UAE central bank are included.
