S&P sees uncertain outlook for global Sukuk market in 2018 as Nigeria relishes success in first attempt

The favourable outcome of Nigeria’s tapping the Sukuk market for the first time in 2017 may well position the country seeing it as a veritable financing option going forward. However, global rating and research firm, Standard & Poor’s says its outlook for the market remains uncertain in 2018, adding that issuance volumes may moderate to between $70 billion and $80 billion from the over $97 billion recorded in 2017.

“While we believe the financing needs of some Islamic finance core countries will remain high, we expect that total issuance will likely decline to $70 billion-$80 billion in 2018.”

The S&P analysts outlined three main reasons for their expectations including a likely tightening in global liquidity, mounting geopolitical risks and slow progress on the standardization of Islamic products.

“The outlook for sukuk in 2018 looks uncertain. While we still foresee significant financing needs for core Islamic finance countries, tighter global liquidity conditions, mounting geopolitical risks, and slow progress on the standardization of Islamic finance products will continue to hold the market back from its full potential,” S&P analysts said in their January 2018 report.

While noting that global liquidity remained abundant in 2017, they expect some tightening in 2018, adding that they see the federal funds rate increasing by 75 basis points in the course of the year.

“Overall, we think that the cost of funding for issuers will rise and that liquidity from developed markets channeled to the sukuk market will reduce or become more expensive,” they noted.

The analysts also believe that geopolitical risk considerations are weighing heavier on the minds of some investors, citing sanctions imposed on Qatar in early June 2017, by a group of Arab states, which resulted in funding outflows from the country’s banking system that is estimated at $21 billion as of Sept. 30, 2017.

Similarly, they see investors look unfavorably upon recent shifts in Saudi Arabia’s power structure and societal norms, which could increase the risk of policy mistakes.

However, a major concern is the slow pace of standardization of Islamic finance products.

“The standardization agenda is progressing slowly: Standard-setting bodies have expended a significant amount of energy in advancing the standardization agenda, but we are not there yet.

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“The Accounting and Auditing Organization for the Islamic Financial Institutions (AAOIFI) and the Islamic Financial Service Board (IFSB) issued several new standards in 2017 aimed ultimately at smoothing the process of sukuk issuance. For example, the former published a standard for central sharia boards and the latter published one on disclosure requirements for sukuk,” they said.

Specifically, they feel market participants still think that standardization is unrealistic and that the market should rather aim for harmonization–defined as having standards that may differ from one jurisdiction to another, leaving some flexibility for implementation

Sukuk issuance in 2017 increased by 45.3 percent, reaching $97.9 billion, up from $67.4 billion in 2016, underpinned primarily by the jumbo issuances of some Gulf Cooperation Council (GCC) countries.

Driving this performance, S&P Global Ratings believes, were good liquidity conditions in the GCC and, more generally, globally, as well as activity by some countries with the goal of further developing their Islamic finance industries.

Jumbo local and foreign currency issuance by some GCC countries drove the sukuk market higher in 2017. Of specific note, the $9 billion sukuk issued by Saudi Arabia was the largest issued globally to date.

The market also attract some Islamic finance noncore countries, with Hong Kong tapping the market for the third time and the first issuance of a Sukuk in Nigeria.

The N100 billion Nigeria sukuk bond with a 7-year tenor was oversubscribed, attracting a whopping N105.88 billion.

“We expect this trend to continue as Morocco and Tunisia plan to tap the market in 2018 and the U.K. announced its intention to go to the market again in 2019 upon the maturity of the Sukuk it issued in 2014,” S&P noted.