GCC sukuk issuances to taper off in H2 as fiscal surpluses loom: Moody's

Accessing funds through Islamic debt is slated to taper off in the Gulf Cooperation Council (GCC) in the second half of this year as fiscal surpluses across the region will limit the new sovereign issuance, according to Moody's, an international credit rating agency."We do not expect the GCC's strong performance in the first half of the year to continue into the second half," Ashraf Madani, vice president, senior credit officer, told a recent media roundtable.Stronger than expected issuance activity from the GCC sovereigns offset a drop in issuance in Southeast Asia and Turkiye, Moody's said, disclosing that the issuance reached $92bn in the first six months of 2022, down from $102bn in the same period of 2021.The GCC sukuk issuance grew 27% to $44bn in the first half of 2022, largely supported by Saudi Arabia; it said, adding the finances of GCC governments are strongly correlated to oil price movements because of their high dependence on hydrocarbon revenues.Elevated uncertainty surrounding the global growth outlook and rising interest rates played a key role in the significant drop in sukuk activity from GCC corporate and financial institutions. Many non-sovereign issuers, which are more sensitive to long-term volatility in rates, have postponed planned issuance or decided to seek alternative funding sources.As a result, sukuk volumes from the GCC corporates and financial institutions fell to $3bn in the first half of 2022 from $14bn in the same period in 2021.Moody's expected the GCC issuance to fall in the second half of the year as high oil prices have lowered the gross financing requirements of oil-exporting countries."We expect global sukuk issuance to decline in 2022, with issuance volume ranging between $160bn and $170bn, down from $181bn in 2021," he said, adding this follows a record volume of $205bn in 2020 after five years of consecutive growth."The improved fiscal position of major sovereign issuers remains the key contributor to the expected drop in volumes this year. In the GCC, high oil prices are reducing governments' financing needs, while in Southeast Asia we expect lower government expenditure because of a decline in pandemic-related spending to reduce governments’ fiscal deficits," the rating agency said.Higher interest rates will maintain pressure on issuance activity, particularly by corporates and financial institutions, which are more sensitive to changes in interest rates. Some issuers have deferred their access to the sukuk market as a result of volatility in long-term interest rates in the first half of 2022."We expect this situation to persist into the second half of the year as major central banks continue to raise rates to combat inflation," the analyst said.Nonetheless, sukuk’ appeal and acceptance as an investment tool is growing, as shown by high demand for recent issuances. It has become normal for order books to exceed the offered amount by three or four times, particularly for creditworthy borrowers.Furthermore, demand for sukuk is increasingly coming from international actors in markets less exposed to Islamic finance.