Malaysia, Indonesia driving sovereign sukuk

PETALING JAYA: Sovereign sukuk issuance, driven mainly by Malaysia and Indonesia, is expected to reach US$30 billion (RM95 billion) by the end of 2014 and see a continued expansion in the number of sukuk-issuing governments into 2015.
"We expect sovereigns to issue approximately US$30 billion of sukuk in 2014, increasing the size of the sovereign market to around US$115 billion by year-end 2014," Moody's Investors Service said.
"We forecast this strong growth momentum to be sustained as both Islamic and non-Islamic governments increasingly tap or newly enter the market. Moreover, we expect demand and liquidity in the market will improve as the sector attracts more global investors. These instruments achieve the same ratings as the sovereign which is typically the ultimate obligor in such structures," it added.
Malaysia and more recently Indonesia have been driving the growth in sovereign sukuk with sales in their domestic markets.
"Together the two countries account for around two thirds of total sovereign issuance as of July 2014 and the remainder of cross-border/international sukuk were offered by a wide array of sovereigns," said Moody's vice president and senior analyst Christian De Guzman.
Moody's estimates that total sovereign sukuk outstanding now accounts for more than 36% of the $296 billion of outstanding sukuk as of July 2014.
"The year 2014 has become a landmark year for sovereign sukuk, with the UK issuing its inaugural sukuk, and with Hong Kong and South Africa expecting to conclude sales in September 2014. All three are major non-Islamic countries, and the transactions indicate a significant change in the potential size, depth and liquidity of this market," said Moody's global head for Islamic finance Khalid Howladar.
"Investors' growing comfort with relatively complex Islamic instruments, the increasing financing needs and leverage appetites of some Muslim countries, as well as a desire for stronger investment links with the faster growing economies in the Gulf and Asia are driving this growth," he added.
Existing capital market hubs, such as London and Hong Kong, are also supporting this growth and Moody's expects many new Islamic and non-Islamic sovereign issuers to continue to enter the market.
Since 2001, 16 governments have issued sukuk instruments, motivated by their own financing needs and strategies.
However, in addition to Hong Kong, South Africa and most recently Sharjah, at least eight other governments of Luxembourg, Morocco, Tunisia, Egypt, Jordan, Oman, Bangladesh and Kenya, have expressed firm intentions to issue sukuk in the short to medium term.
Countries such as Australia, the Philippines, Russia, Azerbaijan, and South Korea have shown moderate interest in the sector, but are unlikely to issue in the near term.