New sukuk issuance falls to $9.3bn in first seven months

New issuance of Islamic bonds (sukuk) dropped to $9.3 billion (Dh34.15bn) in the first seven months of 2009 compared with $11.1bn during the same period in 2008, said Standard & Poor’s Ratings Services in a report yesterday.

“The smaller amount of issuance was due not only to the still-challenging market conditions and drying up of liquidity, but also to the less-supportive economic environment in the Gulf Co-operation Council countries, particularly in the UAE,” said Standard & Poor’s credit analyst Mohamed Damak.

“The medium-term outlook for the sukuk market remains positive, though, in our view, given the strong pipeline – with sukuk announced or being talked about in the market estimated at about $50bn – and efforts to resolve the major difficulties impeding sukuk market development.”

Islamic Development Bank, owned by states including Egypt, Saudi Arabia and Turkey, is in the process of selling $500 million in Islamic bonds. Saudi Electricity Company, the state-controlled power producer, raised about $1.9bn in the largest sale of Islamic bonds in June this year. Malaysia has taken the lead as the major country of issuance for sukuk, accounting for about 45 per cent of issuances in the first seven months of 2009. Issuers in Saudi Arabia have contributed another 22 per cent of sukuk issued during the same period.

The default of a couple of sukuk was possibly partly responsible for the slowdown in issuance. The silver lining was that this default should provide the market with useful information on how sukuk will behave following default, said S&P.

However, major hurdles remain on the path to sukuk market development, including the difficult market conditions, which are slowing the planned issuance of numerous sukuk; the lack of standardisation, notably when it comes to Shariah interpretation; and the low liquidity of the sukuk market, which constrains investors trying to exit the market in times of turbulence or access the market looking for distressed sellers.

The London-based Islamic Finance Information Service (IFIS) said on Monday that the global sukuk issuances declined, led by the Gulf region, in the first half of this year, reaching $9.23bn at the end of June 30, 20 per cent less than the same period last year. However, it expects that the Gulf recovery will begin in the first quarter of next year.

The Islamic bond market was faced with defaults as the global credit crisis spread to the Middle East, hurting issuers in Kuwait, Dubai, and Saudi Arabia. (With inputs from agencies)

 

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