MARKET REPORT
www.islamicnancenews.com
Sukuk Market Grows Despite Roadblocks (Part 1)
By Standard & Poor’s
The Sukuk market continued to progress in the rst seven months
of 2009 despite difcult market conditions and certain longstanding
roadblocks. New issuances topped US$9.3 billion in the rst seven
months of 2009 compared with US$11.1 billion during the same
period in 2008. The smaller amount of issuances was due not only
to the still-challenging market conditions and drying up of liquidity,
but also to the less supportive economic environment in the Gulf
Cooperation Council (GCC) countries, particularly in the UAE (not
rated).
Chart 1: Total Sukuk issuance (2001-2009)
Total Sukuk issued
Bil $
Sukuk cumulative total
100
90
80
70
60
Malaysia (foreign currency A-/Stable/A-2, local currency A+/Stable/
A-1) has taken the lead as the major country of issuance for Sukuk,
accounting for about 45% of Sukuk issuances in the rst seven months
of 2009. Issuers in Saudi Arabia (AA- /Stable/A-1+) have contributed
another 22% of Sukuk issuances during the same period.
The default of a couple of Sukuk was possibly partly responsible for
the slowdown in issuances. The silver lining was that these defaults
should provide the market with useful information on how Sukuk will
behave following default.
Major hurdles remain on the path to Sukuk market development,
however, including:
• Difcult market conditions, which are slowing the planned
issuance of numerous Sukuk.
• The lack of standardization, notably when it comes to Shariah
interpretation.
• The low liquidity of the Sukuk market, which constrains
investors trying to exit the market in times of turbulence or
access the market looking for distressed sellers.
Standard & Poor’s Ratings Services (S&P) still believes that the
medium-term outlook for the Sukuk market is positive, given the strong
pipeline — with Sukuk announced or being talked about in the market
estimated at about US$50 billion — and efforts to resolve the major
difculties impeding Sukuk market development.
Sukuk market continues to grow but at a slower pace
The Sukuk market continued to expand in the rst seven months of
2009 with total issuances topping US$9.3 billion (see Chart 1). The
pace of issuance slowed by about 20% compared with the same
period in 2008, however. The two main reasons for this slowdown were
the deteriorated global market conditions and drying up of liquidity
due to the generalized global economic turbulence and the economic
slowdown in the GCC in general and the UAE in particular, which
resulted in lower nancing needs and reduced access to the market in
one of the main areas driving Sukuk market growth.
S&P expects economic growth in the UAE to be at or slightly negative
in 2009, down from more than 7% in 2008, mainly because of the economic slowdown in the Emirate of Dubai and the steep fall in oil prices.
Nevertheless, the pipeline for Sukuk issuances remains healthy and
the market continues to attract interest from an increasing number of
issuers in both Muslim and non-Muslim countries. In addition, several
stakeholders are trying to lower some of the hurdles that still impede
the market development of Sukuk.
©
50
40
30
20
10
0
2001
2002
2003
2004
2005
2006
2007
2008 2009*
*First seven months of 2009
Source: Standard & Poor’s 2009
In S&P’s view, the lack of uniform standards for Shariah interpretation
has meant that an integrated Sukuk market has yet to emerge. In
particular, various commentators feel that the comments made by the
Accounting and Auditing Organization for Islamic Financial Institutions
(AAOIFI) on the Shariah compliance of certain Sukuk may have
contributed to the decline of the market — though the extent of that
effect is difcult to assess.
The AAOIFI and the central bank of Malaysia have attempted to provide
more uniformity. The AAOIFI has announced that it will screen products
and services for Shariah compliance.
The Malaysian Parliament recently approved a law that gives the National Shariah Advisory Council of the central bank legal status as the nal
arbiter in matters related to Shariah compliance of Islamic products in
Malaysia. These steps could increase investors’ condence in the Shariah compliant aspect of the products and services labeled as Shariah
compliant by AAOIFI and the National Shariah Advisory Council.
Another positive development for the market was the creation of the
Saudi Sukuk and bond market under the Tadawul (the Saudi stock
exchange). Indeed, market observers have pointed out that the lack
of Sukuk liquidity is a primary weakness compared with conventional
bonds. Lack of liquidity became a particularly important factor amid
the nancial turbulence in the GCC. It was difcult for Sukuk investors
to close their positions and free up liquidity.
On a positive note, we understand that some central banks in the Gulf
accept Sukuk for repurchase transactions, which allows banks to use
them as a source of liquidity.
Asia taking the lead
Issuances in 2009 show that Asia has taken the lead in driving the
expansion of the Sukuk market, with more than 60% of the issuances
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11th September 2009
MARKET REPORT
www.islamicnancenews.com
made in Asian countries, and Malaysia as the main domicile country
for issuers (see Chart 2). The Gulf region also continued to play a
signicant role in the development of the market, contributing 36.1%
of total new issuances.
creditworthiness of Petronas, which is the sole primary obligor on the
periodic distributions under the trust certicates and also the sole
primary obligor on the redemption amount at maturity of the trust
certicates under the purchase undertaking.
However, unlike in 2008, when the UAE was among the main drivers
of the market, in 2009 the UAE represented only a limited portion of
new Sukuk issuances mainly because of the signicant slowdown in
Dubai’s economy and the correction of its real estate sector.
US dollar is slowly coming back
In the rst seven months of 2009, the government of the Emirate of
Ras Al Khaimah (A/Stable/A-1) issued the only Sukuk in the UAE, for
a total of US$400 million. During the same period, Gambia remained
the sole African country in which Sukuk were issued, with its central
bank issuing a series of Sukuk for a total of US$7.8 million.
Going forward and once market conditions improve, we believe that
the market will continue globalizing and additional issuers from nonMuslim and Muslim countries will join the club of Sukuk issuers.
The US dollar lost its leadership position in Sukuk issuance in 2008,
with only about 10% of issuance made in this currency for the year.
In the rst seven months of 2009, about 20% of total Sukuk were
issued in US dollars (see Chart 3), signaling the progressive return of
the dollar as one of the main currencies for Sukuk issuance.
Chart 3: Total Sukuk issuance by currency in 2009*
Bruneian dollar
Bahrain dinar
0.71%
1.81%
Gambian dalasi
0.08%
Indonesian rupiah
9.13%
Chart 2: Total Sukuk issuance by country in 2009*
Saudi Arabia
22.03%
UAE
4.26%
Bahrain
9.79%
Brunei Darussalam
0.71%
Malaysia ringgit
45.03%
*First seven months of 2009
Source: Standard & Poor’s 2009
Indonesia
16.05%
However, we expect the dollar to regain its position only slowly because
liquidity is still tight on international markets. Issuers have therefore
concentrated on local markets where liquidity has been more abundant and the appetite for Shariah compliant instruments stronger. S&P
expects the Sukuk market to continue being skewed toward issuance
in local currencies in the foreseeable future, with a relatively limited
portion being issued in dollars. Once market conditions return to normal, dollar-denominated Sukuk should regain a stronger position.
Malaysia
45.03%
*First seven months of 2009
Source: Standard & Poor’s 2009
The rst seven months of 2009 have seen more or less the same
number of Sukuk coming to the market as during the same period in
2008, with about 70 issuances. However, concentration has increased
signicantly, with the 10 largest Sukuk issued during this period
making up 78.7% of total issuances compared with 58.8% during the
same period in 2008.
Saudi Arabia took the lead as the country host to the largest Sukuk
issuance. Saudi Electric Co (AA-/Stable/--) issued that Sukuk, for a
total amount of SAR7 billion (US$1.8 billion). It will reportedly use the
proceeds for general corporate purposes. The issuance is governed by
Saudi law. The sovereign wealth fund of the oil-rich Malaysian state of
Terengganu — the Terengganu Investment Authority (TIA) (not rated) —
issued the second-largest Sukuk, for RM5 billion (US$1.4 billion). The
Malaysian government guaranteed the Sukuk. TIA will reportedly use
the proceeds for its general investments, working capital requirements
and other purposes. This Sukuk has a maturity of 30 years, one of the
longest Sukuk maturities.
In August 2009, Malaysia’s national oil and gas rm Petronas (foreign
currency A-/Stable/--, local currency A+/Stable/--) also issued a large
Sukuk, for a total amount of US$1.5 billion. Our ‘A-’ rating reects the
©
Saudi Arabian
riyal
19.16%
Pakistan rupee
2.04%
Gambia
0.08%
Pakistan
2.04%
US dollar
19.16%
The second and nal part of the article will appear next week.
Primary Credit Analyst
Mohamed Damak, Paris
Tel: +331 4420 7322
[email protected]
Secondary Credit Analysts
Emmanuel Volland, Paris
Tel: +331 4420 6696
[email protected]
Ritesh Maheshwari, Singapore
Tel: +65 6239 6308
[email protected]
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11th September 2009