While major uncertainties remain, once the financial landscape has settled and
issuers and investors have readjusted, new sukuk issuances are expected to
rise, led by high-rated sovereigns funding budget deficits, followed by
financial institutions and corporates.
Borrowing needs and fiscal deficits are set to expand in sukuk-issuing
countries, like the Gulf Cooperation Council (GCC) countries and Malaysia,
which are net oil exporters, due to the oil price fall and the large economic
stimulus packages launched to mitigate the coronavirus's fallout. We forecast
oil prices to average USD35/bbl (Brent) in 2020 due to oversupply. While sukuk
issuers like Indonesia could benefit from lower oil prices as they are net oil
importers, the negative effects of lower commodity export prices and reduced
tourism revenues will lead to budgetary pressures. The risks to Turkey come
mainly from deterioration in global financial conditions. Banks face increased
risks to their credit profiles.
Jurisdictions like Saudi Arabia, which raised SR15 billion in March 2020, have
the benefit of their ability to issue local-currency sukuk due to their
established domestic debt markets, in contrast to most other GCC jurisdictions
which lack local market depth.
Sukuk issuance with a maturity of more than 18 months from the Gulf Cooperation
Council (GCC) region, Malaysia, Indonesia, Turkey and Pakistan rose by 6% in
2019. The volume of outstanding Fitch-rated sukuk reached USD105 billion at the
end of the last quarter of 2019, of which about 32% is estimated to mature in
2020-2022. The issues remain concentrated in Saudi Arabia (38.5%), UAE (16.2%),
Indonesia (14.3%) and Malaysia (10.7%). About 83% of issues are investment
grade and 17% are speculative grade.
Furthermore, the planned shift from LIBOR to the Secured Overnight Financing
Rate (SOFR) in the US dollar market by end-2021 is relevant to the global sukuk
market as dollar-denominated sukuk constitutes over three quarters of all
outstanding sukuk. But of these, more than 90% are fixed rate and so are
unaffected by the planned transition.
Fitch Ratings' approach to rating originator-backed ("asset-based")
sukuk issues means anchoring the rating to that of the originator, as with a
conventional bond issue. For senior unsecured obligations, ratings would
typically be in line with the originator's Issuer Default Rating (IDR).