Global Sukuk Volumes Set to Slide In 2022 Amid Rising Rates and Expensive Liquidity: S&P

The volume of global sukuk issuance this year will drop by about 12 per cent on an annual basis as the cost of borrowing continues to rise amid global interest rate increases and financing needs of issuers decline, according to S&P Global Ratings.

Total issuances this year are expected to reach about $130 billion, down from the $147.4bn recorded in 2021, the agency said in a report on Monday.

“We have revised down our sukuk issuance forecasts for 2022 to about $130bn from our initial projection of $145bn to $150bn, and we see further risks building,” Mohamed Damak, global head of Islamic finance at S&P, said.

Historically high inflation and subsequent rate increases have also “reduced global liquidity and made it more expensive”, he said.

Benchmark interest rates around the world are rising as policymakers attempt to keep inflation in check, with consumer prices in the US, the world’s biggest economy, climbing to a 40-year high in May.

The US Federal Reserve which kept rates near zero during the coronavirus pandemic, reacted last month with a larger-than-expected three quarters of a percentage point interest rate increase, its third in three months and the biggest since 1994, as part of efforts to control inflation.

The Fed has indicated there are more rate increases to come this year and next, and most central banks around the world are expected to follow suit to bring energy and food prices driven by inflation under control.

For 2022, inflation globally has been forecast at 5.7 per cent in advanced economies and 8.7 per cent in emerging market and developing economies, according to the International Monetary Fund.

Inflation, however, is relatively lower in the hydrocarbons-rich economic bloc of the GCC. Consumer price rises are expected to remain in low single digits this year in Saudi Arabia and the UAE.

Investors’ risk aversion has also increased, with major segments of the capital markets experiencing “significantly lower activity” in the first half of 2022 compared with last year, according to S&P.

“The sukuk market, as a component of the global capital market, is not immune to global trends,” Mr Damak said.

Sukuk issuances, both local and foreign currency denominated deals, dropped to $74.5bn in the first half of 2022, compared with $93.3bn reported in the first six months of the 2021.

Most core Islamic financing markets recorded lower sukuk issuance activity, with a few exceptions including Turkey, Bahrain and the UAE that reported “marginally higher numbers”.

Saudi Arabia, Opec’s biggest oil exporter, said there was an increase in local currency issuance volumes, as the government focused on developing its local capital market.

“The rise in oil prices since 2021 has boosted the balance sheets of several issuers in core Islamic finance countries. We were, therefore, not surprised to see a decrease in issuance in first-half 2022,” Mr Damak said.

Corporate issuers also remained cautious about tapping sukuk markets to finance their capital expenditure plans in the first half of this year.

“The scars of the pandemic and uncertainty related to the financing environment have led many to rein in growth investments, turn to banks for funding, or start deleveraging,” he added.

Courtesy By: https://www.thenationalnews.com/