S&P sees slowdown in sukuk issuances in 2015

The global sukuk market is heading into another solid year in 2015, even though some emerging headwinds could slow its progress compared to 2014, said Standard & Poor's.

Sukuk issuance reached $116.4 billion in 2014 compared with $111.3 billion in 2013, and S&P expects total issuance to cross the $100 billion mark again in 2015 to reach between $100 billion to $115 billion

"Supporting sukuk issuance is the still-positive economic performance of core markets such as nations in the Gulf Cooperation Council (GCC) and Malaysia, the implementation of new regulatory requirements such as the Basel III liquidity coverage ratio, and increasing interest in sukuk from countries that have not yet tapped the sukuk market looking to diversify their investor base," said Standard & Poor's credit analyst Mohamed Damak, who is also the company's global head for Islamic finance.

"At the same time," Damak said, "we foresee some turbulence ahead that could cause overall issuance volumes to be lower in 2015."

The US Federal Reserve appears on track to start increasing its benchmark interest rate in the second quarter of 2015, which may reduce liquidity in global capital markets, including emerging markets. Another obstacle for sukuk could come from the drop in oil prices, which could reduce economic growth and ultimately financing needs in core sukuk markets, especially if prices decrease further.

S&P believes 2015 will be marked by a few episodes of turbulence, which could cause lower issuances volumes compared with 2014.

The first will likely come from the current trend in oil prices, which have dropped precipitously over the past few months. We continue to adjust our macroeconomic forecasts in line with our oil price assumptions, already resulting in lower growth and public expenditures expectations for some GCC countries. Despite significant fiscal and external buffers in a number of these countries, the oil price decline could lead to a drop in confidence and decrease in sukuk issuance.

The second episode of turbulence may come from the expected increase in US Fed interest rates, which is likely to reduce global liquidity. A preview of such risk took place in 2013 and to a lesser extent in 2014 when the Fed announced the tapering of its bond-buying programme, known as quantitative easing.

“However, we cannot rule out that emerging market instruments will benefit, as a side-effect, from the monetary stimulus that the European Central Bank is likely to implement in 2015,” S&P said.

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