Oil crash, virus to push Sukuk issuance up by 40%

Higher funding needs for responding to COVID-19 along with declining oil sales will lead to greater Sukuk issuance this year by the largest sovereign issuers, despite its decline as an overall share of funding,  a report predicted at the weekend.

The issuance of Sukuks, often described as ‘Sharia-compliant bonds’, will reach $94billion this year – 43per cent more than last year’s – the paper, released by ratings agency, Moody’s, said.

The rating agency said year-on-year, despite the huge borrowing needs caused by the pandemic, issuance was broadly flat in the first half of this year due to deterioration in market conditions and Sukuks’relative complexity compared to conventional debt instruments.

The Federal Government had handed over N162.557 billion to the Federal Ministry of Works for the proceeds of the third Sukuk Bond that it raised

The proceeds will be used for the construction and rehabilitation of 44 roads in the six geopolitical zones in the country. The Sukuk Bond, third in a row, was oversubscribed by 446 per cent.

The Debt Management Office (DMO) had said the demand for the bond came from a wide range of investors, including ethical funds, insurance companies, and retail investors.

According to the DMO, the benefits of the Sukuk Bond in the financing of roads include improved safety on the roads, faster travel time, access to markets for farm produce and opening up parts of the country for development, job creation and increase level of activity for service providers many of whom are small business.

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The DMO will continue to raise funds through the Sukuk to support improvement in infrastructure and development of the domestic capital market.

According to Moody’s report, in Gulf Cooperation Council states, Sukuk issuance dipped. Saudi Arabia issued $6.8billion, compared to $9.4billion in the first half of 2019, and Qatar issued none at all, despite an expected $6.4billion fiscal deficit this year.

But as market conditions recover, and with no sign of borrowing requirements dropping off, Moody’s has predicted the use of Sukuks will see “sizeable increases” in both of these countries, with oil prices stabilising at lower than expected amounts, as well as in Indonesia, Malaysia and Turkey.

Indonesia has announced stimulus measures to respond to the pandemic worth nearly $50billion, and now expects its deficit to reach 6.3per cent of gross domestic product (GDP), and nearby Malaysia now predicts its own deficit will reach 5.8 per cent after announcing $2.4billion of cash handouts to boost household consumption.

The Turkish government has committed about $15billion of stimulus measures so far, including expanding social transfers, tax cuts and support for industries such as tourism, leaving its fiscal deficit expected to rise from 4.6per cent of GDP last year to 7.5per cent.

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These will require borrowing, and the growing appetite for Shariah-complaint products in many of these countries means the report projected continued growth of Sukuk issuance in the medium term.

But despite this, Moody’s predicted that Sukuks will decline as a share of government funding “largely due to the preference for conventional issuance over Sukuk during the period of elevated market volatility in the second quarter of 2020.

“In many cases, domestic Sukuk markets have not reached sufficient depth to meet the sudden increase in financing needs like in this most recent crisis.

“Additionally, while the spread has narrowed, Sukuk issuances continue to attract a slight premium over their conventional counterparts, which may dis-incentivise issuers who are already grappling with higher borrowing costs.”

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