Sukuk supply uncertain but long-term demand is intact – Fitch Ratings

Total US dollar-denominated sukuk issuance from the core markets of the GCC, Malaysia, Indonesia, Turkey, and Pakistan (including multilaterals) fell by 17.2% qoq in 2Q22, whilst US dollar bond issuance fell by 63.8%, Fitch Ratings says. More than 90% of Fitch-rated sukuk that returned to the market in 2Q22 were investment-grade.

“It remains unclear if sukuk supply will be able to recover in 2H22 because of higher oil prices reducing oil-exporting sovereigns’ new funding needs, funding diversification plans not being followed, complexities related to sharia compliance, political risks, interest-rate hikes and lower global investor appetite for emerging-market debt,” says Bashar Al-Natoor, Global Head of Islamic Finance at Fitch. “However, intact Islamic investor appetite, upcoming debt maturities, Islamic-finance development plans from a number of governments, and funding diversification strategies across the sector will support the market longer-term.’’.

Issuance of US dollar-denominated sukuk has been less affected than bonds amid the volatilities in 1H22. Fitch analysed the pricing of 42 comparable sukuk and bonds issued by the same obligors from the GCC, Malaysia, Indonesia and Turkey. Their yield-to-maturity continued to be strongly correlated in 2Q22 despite macro volatilities, as was the pricing of comparable sukuk and bonds. In 2Q22, 77.8% of sukuk ratings were investment-grade. About 72% of sukuk issuers have a Stable Outlook and 19.4% have Positive Outlook. Total ESG-linked outstanding sukuk reached USD19.3 billion in 2Q22, up 11.2% qoq.

Fitch has updated its Sukuk Rating Criteria to describe triggers that are increasingly seen in sukuk documentation that could take the form of put options, a dissolution event, a partial loss event or covenants related to tangibility events, which are specific to sukuk and driven by certain sharia requirements.