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The global sukuk market will continue to rebound from a sharp drop in volumes in 2015, supported by a range of factors, including rising sovereign issuance, product innovation, increasing demand from retail banks and a narrowing of spreads over conventional bonds, Moody's Investors Service said in a report today.
Moody's estimates that total sukuk issuance will reach around $95 billion by the end of this year, after more than $85 billion in 2016, including more than $50 billion of sukuk issuance by sovereigns.
"Sovereigns have underpinned a recovery in the global sukuk market this year, with their issuance increasing by 50% in the first eight months of 2017," said Christian de Guzman, a Moody's Vice President -- Senior Credit Officer and one of the report's authors. "We expect sovereign sukuk issuance volumes will continue to grow in 2018 as governments look to diversify their financing mix and satisfy the liquidity needs of Islamic retail banks."
A number of factors will support sovereign sukuk issuance, including high borrowing needs for GCC sovereigns, which Moody's expects to reach around $148 billion in 2018. GCC countries drove the market's growth in 2017 with Saudi Arabia (A1 stable) raising the lion's share of sukuk during the year to a total of $17 billion, or 40% of global long-term sovereign sukuk issued in the first eight months of the year.
Other countries with large fiscal deficits, such as Oman (Baa2 negative) and Bahrain (B1 negative) -- estimated at 11.9% and 13.4% of GDP in 2017 respectively -- will also contribute to the market's expansion.
Other factors contributing to higher sovereign sukuk issuance include demand from domestic banks, and product innovation that will help address two fundamental challenges faced by the issuers: the lack of physical assets for structuring sukuk and the prohibition from transferring asset ownership to special purpose vehicles (SPVs) under some jurisdictions. Narrowing of spreads over conventional bonds will also contribute to sukuk issuance.
Despite Malaysia's (A3 stable) falling share of sovereign sukuk issuance, it remains the largest sukuk market with an estimated 43% of total sovereign sukuk outstanding in 2016. Indonesia's (Baa3 positive) share in annual sukuk issuance has increased to 30% in 2016 (from just under 10% in 2010) and will likely grow with the government's efforts to develop the Islamic finance sector.
Although the number of new entrants into the sukuk market has declined since 2014, Nigeria (B2 stable) issued its first sukuk this year and a number of sovereigns have indicated that they intend to take advantage of the asset-based nature of sukuk financing to finance their sizeable infrastructure needs, including Niger (unrated), Kenya (B1 Rating Under Review), Ghana (B3 stable), Morocco (Ba1 positive), Tunisia (B1 negative) and Algeria (unrated).
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