Fitch Ratings, a provider of credit ratings, commentary and research, also cited geopolitical events and a lower debt appetite among emerging markets as a factor that has propelled a 14.4% quarterly drop in sukuk issuance in the core markets in the third quarter of this year (3Q22).
The issuance of bonds showed a marginally lower drop of 14.1%.
Apart from Malaysia, the core markets are the Gulf Cooperation Council (GCC) countries, Indonesia, Turkey and Pakistan.
Fitch expects US interest rates to rise to as high as 4% by the 2023 financial year, while oil price will likely be around US$85 per barrel next year.
However, things do not seem so dire.
According to Bashar Al-Natoor, global head of Islamic Finance at Fitch Ratings, the sukuk pipeline is developing behind the scenes despite the fall in issuance in the last quarter.
“It’s just waiting for the right market conditions,” he said.
He noted that although oil-exporting countries have benefited recently from higher prices of the commodity, they would still need funding in the medium to long-term to meet their various strategies.
“However, oil-importing nations will need these sources of funding while global volatilities remain,” Al-Natoor said.
Sukuk demand will stay intact, enabled by Islamic banks – sukuk’s traditional investor – whose liquidity will be lifted by high oil prices, he said.
Al-Natoor said funding diversification plans across sectors, upcoming debt maturities, and further maturity of the domestic debt capital market in a number of countries would also continue to drive sukuk issuance.
The number of Fitch-rated outstanding sukuk expanded by 7.3% quarter-on-quarter (q-o-q) in 3Q22, to a volume of US$133.9 billion (RM570.7 billion), 79% of which was investment-grade. Global outstanding sukuk reached US$749.6 billion (RM3.19 trillion), up 2.1% q-o-q.
The strengthening US dollar has nudged non-pegged sukuk issuers to raise funding in the domestic market. ESG-related (environmental, social and governance) sukuk were up 2.8% q-o-q, with US$20 billion (RM85.3 billion) outstanding in 3Q22.
Short-term sukuk issued by governments are present in markets such as Malaysia, Indonesia, Bahrain, Turkey, Qatar and Pakistan, providing Islamic banks a venue to invest their excess liquidity.
Still-developing markets, like Oman, Jordan, Nigeria, and Egypt, do not have short-term government sukuk.