SUKUK issuance is expected to fall by 5 per cent this year due to the Covid-19 pandemic, ending four years years of rapid growth, a report by Moody's Investors Service has suggested.
Some US$77 billion in sukuk was issued in the first six months of 2020, US$87 billion in the same period of 2019 as the pandemic pared activity in Malaysia and Indonesia, Moody's said.
Issuances from Malaysian entities fell 9 per cent to US$32.8 billion. Even so, Malaysia remained the world's leading issuer, with a 42 per cent share of the total versus a 41 per cent share during the same period last year, Moody's said.
On the whole, Moody's is expecting sukuk issuance volumes for the full year to be around US$170 billion, below the US$179 billion logged in 2019, a year that saw a significant 36 per cent increase in issuance.
While the decline marks a reversal from four consecutive years of growth, Moody's said 2020's figure will still be the second highest issuance level for the sukuk market ever.
This is because Moody's is expecting activity to pick up in the second half of 2020, as governments look to raise money to meet the financing requirements of their responses to the pandemic. Persistently low oil prices could also lead to higher deficits and financing needs among oil-exporting issuers, primarily in Gulf countries, it added.
"Furthermore, we continue to expect rapid growth in sukuk issuance over the longer term. The sector remains underrepresented in global finance, comprising just 5 per cent of the global financial system while close to a quarter of the world's population is Muslim," Moody's said, noting that many Muslim-majority countries like Indonesia, Malaysia and Turkey are pushing to expand Islamic finance to meet the needs of their populations.
It added that is expecting Malaysia and Indonesia to remain key issuers as both governments continue to promote their Islamic finance sectors. Both countries also rely on commodity exports and are therefore affected by the current decline in commodity prices, it said.
"We expect Malaysia will continue to dominate global sukuk issuance volumes both in the long and short term market, with issuances remaining mostly denominated in local currency," it said.
As for Indonesia, the government will remain the country's most active issuer through regular drawdowns under its sukuk Medium-Term Note programme, Moody's said, adding that its central bank has started issuing short-term sukuk in local currency as well.