High oil prices, geopolitical uncertainties and an AAOIFI revision could slow Sukuk issuance for the rest of 2024, Fitch Ratings projected. This comes on the back of overall bond issues falling 24.3% in Q1 2024.
Specifically, if the AAOIFI Shariah Standard No 62 on Sukuk, in exposure draft format, is finalized this year, Fitch said this “could alter the credit-profile of Sukuk from asset-based to asset-backed”. The impact is unclear as “actual standards adoption, implementation and interpretation vary significantly between regulators and institutions”.
Saudi Arabia could be an active issuer to address a forecast budget deficit of 3% of GDP in 2024 and 3.4% of GDP next year. Malaysia, being dependent on oil-related revenue, could see its 2024 slightly expansionary budget drive Sukuk issuance.
Bahrain, with wide deficits, may eye more Sukuk issues, beyond GCC funding. While surpluses are expected in the UAE, funding diversification by issuing Sukuk is expected.
Hitting US$867 billion at end-Q1 2024, global outstanding Sukuk rose 10.3% year-on-year, with core Sukuk markets being the GCC, Malaysia, Indonesia, Turkiye and Pakistan.
“GCC banks’ US dollar debt issuance in Q1 2024 already exceeded the full-year 2023 issuance, with 51% in Sukuk format.”
Sukuk remain a key funding tool in these markets, with a 33% debt capital market (DCM) issuance share in all currencies (Q4 2023: 26.8%). While corporates and projects seek bank funding, Fitch projected the government push to develop the DCM and reduce bank reliance can drive Sukuk issuance.
Fitch expects GCC DCM to surpass US$1 trillion, after reaching US$940 billion outstanding in Q1 2024, with 37% in the Sukuk format.
“There were no defaults of Fitch-rated Sukuk in Q1 2024, while the share of Sukuk issuers with a positive outlook expanded to 8% (Q4 2023: 3.6%), alongside 90% with stable outlook (Q4 2023: 93.6%).”
