The Gulf Cooperation Council (GCC) countries will lead a rally in the issuance of Islamic debt or sukuk in the second half (H2) of 2020, according to Moody's, an international credit rating agency.
Volumes are likely to rebound in H2 of 2020, as governments raise money to finance their responses to the coronavirus crisis, the rating agency said.
"We expect issuance will rally in H2 of the year to around $90bn, led by sovereigns in the Gulf," said Nitish Bhojnagarwala, vice president-senior credit officer at Moody's.
Sukuk market volumes are usually lower in H2 of the year, but the sharp decline in crude prices and persistent uncertainty regarding the length of the coronavirus pandemic will force sovereigns to raise funding to support their economies.
Persistently low oil prices could also increase deficits and financing needs among oil-exporting issuers, primarily in Gulf countries, it added.
"We therefore expect borrowing requirements of the GCC sovereigns to be higher in 2020 than in 2019,” it said.
In addition, Moody’s expects the GCC sovereigns to continue diversifying their funding mix in favour of sukuk instruments in order to develop their Islamic debt markets and that several issuers will also need to refinance sukuk listed after 2015 that will begin to mature in the coming years.
Although the GCC issuance held up well, it found that the issuance in Qatar fell to $0.8bn from $2.9bn from H1, 2019 with zero issuance from the Qatari government in the sukuk format and lower volume from Qatari financial institutions.
The issuance by banks was subdued due to liquidity provided by the Qatar Central Bank to relieve domestic funding pressures following the pandemic, Moody's said.
Sukuk issuance is set to fall 5% overall this year to about $170bn because of the coronavirus crisis, after four years of rapid growth, Moody's said, adding the decline will be partly limited by the financing needs of the GCC countries because of lower oil prices and the pandemic.
Despite the decline, 2020 will still see the second highest sukuk issuance total ever, following a 36% increase in 2019.
Total issuance in the first six months of 2020 dropped to $77bn, down 12% from the same period last year, as activity in Malaysia and Indonesia flagged.
The issuance in Southeast Asia dropped by 25%, while volumes in the Middle East rose 7%, the report said.
An earlier report of Moody's had said global sovereign long-term sukuk issuance will grow modestly in 2020, continuing the expansionary trend of the past few years.
"Though the green sukuk market is in its infancy, issuance is likely to accelerate as efforts to combat climate change gain traction," according to Bhojnagarwala.
A recent joint report of the Qatar Financial Center and Refinitiv said regulators in Qatar should supplement the sustainable investment strategy with regulatory frameworks based on best practices, especially for green bonds.