Sukuk issuance to slow in Q3, expected to rebound in 4Q 2024

July 24, 2024 (MLN): Sukuk issuance in Q3 2024 is expected to be slow, coinciding with summer holidays, before picking up in 4Q2024 due to efforts in funding diversification, refinancing goals, addressing budget deficits, and supporting governments' development plans, according to Fitch Ratings.

“Sukuk continues to hold a significant debt capital market share in core Islamic finance markets. It also contributed to over 10% of all emerging-market US dollar debt issued in 1H24 (excluding China), and we expect it to expand over the next few years” said Bashar Al Natoor, Global Head of Islamic Finance at Fitch Ratings.

“About 81% of all rated sukuk are investment-grade, 91% of issuers on Stable Outlook and 7% on Positive Outlook,” he added.

Many GCC countries and Turkiye have ongoing funding needs. The US Federal Reserve’s expected rate cuts in 3Q24 (end-2024F: 5%; end-2025F: 3.75%) could provide issuance impetus. Lower oil prices could also drive sukuk (2024F: USD80/bbl; 2025F: USD70/bbl).

However, a few markets, such as Qatar and Oman, are deleveraging amid government repayments, and Indonesia and Malaysia are exhibiting fiscal restraint with slower issuances.

Fitch expects Islamic banks to continue diversifying into sukuk, even though deposits will remain the key funding source.

While corporates will likely continue being bank funding reliant, diversification efforts could drive sukuk.

Global outstanding sukuk grew 10.2% YoY to about $888 billion at end-1H24.

In 2Q24, US dollar sukuk issuance had a quarterly fall of 20.3% in core markets, while bonds fell further (27%) in the same markets.

Starting end-May 2024, only sukuk deemed materially compliant with the AAOIFI sharia standards and guidelines by the Higher Sharia Authority of the UAE central bank are included in the J.P. Morgan Global IG Sukuk Index.

AAOIFI filters are seen in other sukuk indices and funds. This could affect international investor demand for non-AAOIFI-compliant sukuk. AAOIFI extended the feedback deadline for its Sharia Standard No. 62 exposure draft to end-July.

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