As global Islamic bonds languish in the bleakest year for sales since 2010, the next 12 months look just as challenging.
Malaysia’s CIMB Group Holdings Bhd, the top sukuk arranger worldwide for seven of the last nine years, predicts a pick up in 2016 to at least $40bn from 2015’s $34.5bn. The forecast is still 20% less than the record $50.1bn in 2012, data compiled by Bloomberg show.
Slowing economic growth could weigh on companies’ capital and their investment spending, tempering any increase in Shariah-compliant bond issuance next year, according to RHB Investment Bank Bhd. Borrowers in the $2tn Islamic finance industry also now face higher costs after the US raised interest rates for the first time in almost a decade and signalled more increases.
“Sukuk supply will fall with rising yield expectations,” said Angus Salim Amran, the Kuala Lumpur-based head of financial markets at RHB Investment, Malaysia’s second-biggest Islamic bond arranger. “Lower oil prices may encourage governments and corporates to explore better cost efficiencies, which may reduce borrowing requirements and lead to lower sukuk sales.”
Angus said the potential decrease in government revenue and higher budget deficits may encourage sovereigns to tap the Shariah-compliant debt market, but at the same time, if companies curtail plans due to slowing growth then sukuk sales next year will be more in line with 2015.
Global issuance has fallen 29% from last year’s total and offerings are down 17% to 54.2bn ringgit ($12.6bn) in Malaysia, the world’s biggest market for the debt, data compiled by Bloomberg show. Worldwide sales amounted to $48.5bn in 2014 and $48.8bn in 2013.
CIMB predicts investment and infrastructure spending will be the likely drivers behind new Islamic bond offerings in 2016. Ghana and Morocco are also set to debut Shariah-compliant debt in 2016, while Sichuan Development Holding would become the first company from China to sell sukuk if it gets a sale off the ground.
While issuance in the six-member Gulf Cooperation Council has dropped 33% to $9.9bn in 2015, the poorest showing since 2011, sales are expected to gather pace next year as Qatar and Saudi Arabia lead spending, said Mohamad Safri Shahul Hamid, the Kuala Lumpur-based senior managing director and deputy chief executive officer of CIMB Islamic Bank Bhd, a unit of CIMB Group.
Qatar is spending $182bn on infrastructure such as roads and stadiums as it prepares to host the soccer World Cup in 2022. A 41% slump in oil prices in the past 12 months could also foster more issuance from Saudi Arabia, which is the top exporter among the Organization of the Petroleum Exporting Countries and is part of the GCC.
While Saudi Arabia’s fiscal deficit is pushing the government to consider selling bonds and search for savings, major development initiatives won’t be delayed, Finance Minister Ibrahim al-Assaf said this year. The kingdom is likely to continue selling debt to finance its burgeoning deficit, according to an October report by Standard & Poor’s credit analyst Mohamed Damak.
The Indonesian government has set aside over 300tn rupiah ($21.9bn) for infrastructure next year and may step up sukuk sales to fund those projects, said CIMB’s Safri. Malaysia has a $444bn development programme, with many local companies undertaking the construction of roads, railways and power plants as part of that plan who sell Islamic bonds for financing.
“It won’t be an easy year,” said Mohd Effendi Abdullah, the Kuala Lumpur-based head of Islamic markets at AmInvestment Bank Bhd, Malaysia’s fourth-biggest sukuk arranger. “While project financing sukuk may pick up, corporates may defer sales or seek alternative cheaper funding in light of the rising interest-rate environment and general economic slowdown.”