Global sukuk supply is expected to accelerate in 2021 following a resilient 2020 as issuers seek to refinance maturing debt and fund large budget needs, Fitch Ratings says. The easing of GCC investment restrictions following the normalisation of relations between Qatar and its neighbours will also contribute to higher volumes.
Innovative and diverse issuances like green, sustainable, transition and hybrid sukuk are likely to continue to attract wider investor demand.
Sovereigns in key Islamic finance jurisdictions are expected to remain major contributors to overall sukuk volumes. Issuance from first-time sovereign issuers, financial institutions and corporates are set to increase as they face challenging conditions and take advantage of the current lower cost of funding.
Qatari sukuk volumes are expected to gradually rise after the normalisation of relations between Qatar and its GCC neighbours, and the eventual easing of investment restrictions for Islamic investors based in countries such as Saudi Arabia and UAE.
Sukuk issuances with maturities of more than 18 months from the GCC region, Malaysia, Indonesia, Turkey and Pakistan fell slightly by 1.9% y-o-y to reach USD41.3 billion in 2020. The volume of total outstanding Fitch-rated sukuk reached USD118.6 billion, 12.9% higher y-o-y. Green & Sustainable sukuk supply increased sharply by 96.2% y-o-y to reach US$8.4 billion.
However, the rating outlook for sukuk remains challenged. The proportion of sukuk from issuers with Negative Outlooks increased sharply to 23.4% (2019: 1.5%), mainly due to Covid-19-related disruption and low oil prices. Only one international sukuk publicly defaulted in 2020: NMC Health plc (unrated by Fitch). About 81.3% of sukuk were investment grade.
The ICE Benchmark Administration has announced a consultation on the cessation of a number of USD Libor reference tenors being delayed from December 2021 to June 2023, to give extra time for the transition. However, the bulk of the sukuk market is fixed-rate and largely unaffected.