The total sukuk issued grew by 11.6% in the first quarter (Q1) of 2022 to reach $64.5 billion driven by sovereigns and multilateral institutions despite volatilities, said Fitch Ratings in a new report.
However, it is unclear if sukuk issuance will be able to sustain its growth in the near term due to continued market volatilities and the seasonal pattern of Ramadan, which is usually a quiet period, according to the report titled “Global Sukuk Market Outlook: 1Q22”.
“Higher oil prices could virtually eliminate new financing needs from GCC sovereigns, with all expected to run surpluses except Bahrain”, said Bashar Al-Natoor, Global Head of Islamic Finance at Fitch. “Nevertheless, the longer-term view of the sukuk market continues to be solid, supported by issuance from net oil-importing sovereigns, upcoming debt maturities, and funding diversification strategies across sectors.”
Most sukuk issuers in core markets have little direct exposure to the Russia-Ukraine war, although indirect exposure varies.
Additionally, intact Islamic investor appetite, mainly from GCC Islamic banks whose already stable liquidity profiles are likely to be buoyed by the high oil prices, continues to be a key driver for sukuk growth.
Global outstanding sukuk reached $722.8 billion at end-1Q22, 1.5% higher than end-2021. Total Fitch-rated sukuk outstanding reached $135.2 billion, up by 2.1%. In 1Q22, 79% of sukuk ratings were investment-grade and 88.5% of issuers have a Stable Outlook.
Sukuk issuance growth was also stronger than bonds in emerging markets. In 1Q22, total dollar-denominated sukuk issued in emerging markets (excluding China and multilateral institutions) rose by 97%, whereas bond issuance increased by only 7.6%. A Fitch-analysed sukuk index also outperformed an emerging market bonds index in 1Q22.
The pricing of comparable sukuk and bonds continued to be strongly correlated in 1Q22 despite volatilities, unlike 1H20, when sukuk were sold at steeper discounts than bonds amid Covid-19 and system liquidity pressures following the oil price plunge.