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An Outlook of the Global Sovereign Sukuk Market 24 October 2014.

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Presentation on theme: "An Outlook of the Global Sovereign Sukuk Market 24 October 2014."— Presentation transcript:

1 An Outlook of the Global Sovereign Sukuk Market 24 October 2014

2 Sovereign Sukuk Overview 2 Overview Global Sukuk market has doubled over the last three years, with a CAGR of 30% during last 10 years The stock of Sukuk outstanding almost quadrupled during the 10 year period as annual issuance rose from around $32 billion in 2010 to a record $83 billion at the close of 2012, on the back of significant capital flows into emerging markets Volumes of sovereign Sukuk have increased substantially over the last three years.

3 Sovereign Sukuk Overview 3 Overview Source: Moody’s Annual Sovereign Sukuk Issuance by Type of Issuer (US$ billions): July 2014 Annual Sovereign Sukuk Issuance by Type of Issuer (US$ billions): July 2014

4 Sovereign Sukuk Overview 4 Overview Sovereign Sukuk accounts for around 36% of $296 billion outstanding total global Sukuk market as of July 2014 Annual sovereign Sukuk issuance rose sharply from approximately $15 billion in 2010 to $33 billion in 2012 and $23 billion in Overall sovereign issuance grew at a CAGR of 30% from $1.7 billion in 2003 Many sovereign Sukuk have matured and those Sukuk outstanding amounted to $105 billion as of July The expected outstanding volume will reach $115 billion by year-end 2014

5 Sovereign Sukuk Overview 5 Source: Moody’s Outstanding Sovereign Sukuk Issuance by Type of Issuer 2001 – July 2014 Overview

6 Outlook for Sovereign Sukuk Global Sukuk issuance is expected to reach around $70 billion exceeding 2013 levels Sovereign issuance is expected to increase to around $30 billion this year, expanding the size of the sovereigns market to around $115 billion Most sovereign Sukuk are issued in local currencies for domestic investors Of the $105 billion sovereign Sukuk outstanding at July 2014, approximately $20 billion (19%) are foreign-currency, cross-border instruments of which almost all are denominated in US dollars Sovereign Sukuk are expected to remain unsecured credit risk Sukuk achieve the same rating as that of the sponsoring sovereign which is the ultimate obligor for payment obligations. As per the credit quality of the respective issuer, there has been no sovereign Sukuk defaulted to date 6 Overview

7 Outlook for Sovereign Sukuk In the medium term, the international issuances will remain driven by sovereign and government-related issuers from the GCC countries because of their US dollar currency pegs Saudi Arabia (Aa3, stable), is the exception and will likely continue to issue local currency Sukuk due to its strong domestic investor base For now, Sukuk issuance remains a small but growing percentage of worldwide government debt issued globally The general government debt stock of Moody’s-rated sovereigns totaled more than $56 trillion as of year-end 2013,of which only 0.2% were Sukuk instruments The Organization of Islamic Cooperation represents 57 countries and represents around 9.3% and 3.7% of global GDP and global sovereign debt outstanding, respectively, highlighting plenty of room for potential growth Source: Moody’s Sovereign Sukuk are expected to remain unsecured credit risk Sukuk achieve the same rating as that of the sponsoring sovereign which is the ultimate obligor for payment obligations. As per the credit quality of the respective issuer, there has been no sovereign Sukuk defaulted to date 7 Overview

8 Outlook for Sovereign Sukuk Source: Moody’s Sovereign Sukuk Outstanding- Local vs Foreign Currency Sovereign Sukuk are expected to remain unsecured credit risk Sukuk achieve the same rating as that of the sponsoring sovereign which is the ultimate obligor for payment obligations. As per the credit quality of the respective issuer, there has been no sovereign Sukuk defaulted to date 8

9 Outlook for Sovereign Sukuk Factors Contributing to Growth On the capital markets demand side, Asian and Middle Eastern countries attract increasing numbers of global investors in search of yield and diversification. The GCC is becoming a key allocation within emerging market fixed income portfolios. The fast growing Islamic banking sector is also key market driver for high quality sovereign paper On the capital markets supply side, debt-to-GDP levels are still relatively low in the Sukuk issuing countries and their investment needs are relatively high with the six countries of the GCC having extensive infrastructure spending plans over the next decade. Given their relative credit strength and debt capacity, they are likely to become large volume issuers On the capital markets demand side, Asian and Middle Eastern countries attract increasing numbers of global investors in search of yield and diversification. The GCC is becoming a key allocation within emerging market fixed income portfolios. The fast growing Islamic banking sector is also key market driver for high quality sovereign paper On the capital markets supply side, debt-to-GDP levels are still relatively low in the Sukuk issuing countries and their investment needs are relatively high with the six countries of the GCC having extensive infrastructure spending plans over the next decade. Given their relative credit strength and debt capacity, they are likely to become large volume issuers Sovereign Sukuk are expected to remain unsecured credit risk Sukuk achieve the same rating as that of the sponsoring sovereign which is the ultimate obligor for payment obligations. As per the credit quality of the respective issuer, there has been no sovereign Sukuk defaulted to date 9

10 Outlook for Sovereign Sukuk Factors Contributing to Growth Stronger trade and investment links with the world’s fastest growing economies is a goal for some of the more mature economies. Many of these are in Muslim countries and possess emerging pools of Islamic capital Capital market hubs such as Hong Kong, Singapore, London, Dubai, Kuala Lumpur and Bahrain, amongst others, are seeking to maintain and enhance their positions in this new industry. Their initial issuances add to supply, serve as a benchmark for domestic corporates, stimulate local market growth and provide Islamic Financial Institutions (IFIs) with instruments for liquidity management Cultural affinity for Islamic finance is a key, non-economic rationale for the development of the sector and the necessary Sovereign Sukuk benchmarks Stronger trade and investment links with the world’s fastest growing economies is a goal for some of the more mature economies. Many of these are in Muslim countries and possess emerging pools of Islamic capital Capital market hubs such as Hong Kong, Singapore, London, Dubai, Kuala Lumpur and Bahrain, amongst others, are seeking to maintain and enhance their positions in this new industry. Their initial issuances add to supply, serve as a benchmark for domestic corporates, stimulate local market growth and provide Islamic Financial Institutions (IFIs) with instruments for liquidity management Cultural affinity for Islamic finance is a key, non-economic rationale for the development of the sector and the necessary Sovereign Sukuk benchmarks Sovereign Sukuk are expected to remain unsecured credit risk Sukuk achieve the same rating as that of the sponsoring sovereign which is the ultimate obligor for payment obligations. As per the credit quality of the respective issuer, there has been no sovereign Sukuk defaulted to date 10

11 Outlook for Sovereign Sukuk Source: Moody’s International Sovereign Sukuk, by Country Sovereign Sukuk are expected to remain unsecured credit risk Sukuk achieve the same rating as that of the sponsoring sovereign which is the ultimate obligor for payment obligations. As per the credit quality of the respective issuer, there has been no sovereign Sukuk defaulted to date 11

12 Sovereign Sukuk Issuer Overview 12 Malaysia will continue to dominate sovereign issuances, though the UAE and Qatar will lead the international volumes. Turkey and Indonesia have large fiscal financing needs and are also highly supportive of the sector and have taken steps to promote it through specific legislation and numerous benchmark sovereign issuances Saudi Arabia’s Sukuk market continues to grow although volumes are driven more by quasi-sovereign issuers. It has a very low debt-to-GDP ratio of 3% and extensive public spending plans, leaving substantial headroom - and need - for further issuance

13 Sovereign Sukuk Issuer Overview 13 Source: Moody’s All Sukuk Outstanding by Country

14 Sovereign Sukuk Issuer Overview 14 Sovereign Sukuk Outstanding

15 Sovereign Sukuk Issuer Overview 15 Taking Malaysia as a potential benchmark for sovereign Sukuk penetration, other Muslim countries which are actively pursuing an Islamic finance agenda may over time increase the Sukuk share of their debt to refinance around 35%- 40% of their debt through Islamic financing route This trend is expected to be supported by the increasing acceptance of Sukuk by global investors and their own local banking systems

16 Sovereign Sukuk Issuer Overview 16 Source: Moody’s Sukuk as a % of Total Government Debt Source: Moody’s

17 Asia Pacific Region CountryOverview Malaysia Largest Issuer – 59% of total sovereign Sukuk outstanding as of July 2014 Around 35% of government debt is in Sukuk form International Liquidity Management Corporation (IILM) was established in Kuala Lumpur to address the issue of lack of instruments to help manage liquidity for all IFIs globally Indonesia In 2008 Sovereign Sukuk Law Number 19 was enacted, paving way for the government to issue domestic sovereign Sukuk Total issuance to date is around $20 billion, majority being sovereign, less than $1 billion from corporate sector New issue of $1.5 billion was closed in September 2014 Regional Overview 17 Source: Moody’s

18 Asia Pacific Region CountryOverview Singapore and Hong Kong Unlikely to become volume issuers due to lack of domestic demand Seeking to leverage their existing “hub” strengths to gain substantial share of the industry Hong Kong’s inaugural issue of $1 billion was closed in September 2014 Singapore introduced changes to regulation to support development in Islamic Finance. Monetary Authority of Singapore has issued about SGD200 million of Sukuk since 2009 Pakistan State Bank of Pakistan published a 5-year strategic plan in Feb 2014, to address the lack of coordinated policies and deficiency of government Sukuk issuance Government has about $3.4 billion of sovereign Sukuk outstanding as of July 2014 and is expected to come up with another issue in 2014 Regional Overview 18 Source: Moody’s

19 Regional Overview 19 GCC Region CountryOverview Saudi Arabia Issued a record SAR39.4 billion ($10.5 billion) issuance of riyal denominated Sukuk in 2013, following a benchmark Sukuk issuance by the General Authority of Civil Aviation in early 2012 Strong flow continued in 2014 with another $10.3 billion issued during Jan-July 2014 Sukuk market is expected to grow, holding its place as the second largest Sukuk market behind Malaysia Islamic Development Bank (“IsDB”) has an influential role in promoting and setting several standards for Islamic finance. IsDB is one of the largest issuers of Sukuk along with governments of Malaysia, Qatar and Indonesia, with its $6.4 billion Sukuk paper United Arab Emirates Governments of Dubai, Abu Dhabi and Sharjah are active in the international Sukuk market driven by the US dollar currency peg, large financial needs and leverage appetite They collectively lead international issuance globally with over $26.8 billion of Sukuk outstanding Dubai is also seeking to establish the world’s first fully Islamic export-import bank in order to support the investment needed in the run up to the UAE Expo 2020 Source: Moody’s

20 Regional Overview 20 GCC Region CountryOverview Qatar In July 2012, the Government of Qatar issued $4 billion of international Sukuk with 5- and 10- year maturities As of July 2014, Qatar Central Bank had about QR24 billion ($6.6 billion) of outstanding domestic Sukuk Bahrain Bahrain was the first government to issue international Sukuk in Sep 2001 Sukuk issuance volumes remains relatively low and mostly limited to small, short term (less than one year) issuances Source: Moody’s

21 Regional Overview (cont’d) 21 European Region CountryOverview Turkey Returned to the international Sukuk market in Oct 2013, with a dollar denominated $1.25 billion issuance Turkish authorities have identified Islamic finance as one of the key drivers of the country’s long term plan, the “2023 Vision”, aimed at positioning Istanbul as one of the top 10 international financial centres over the next 10 years The United Kingdom Raised GBP200 million ($334 million) in June 2014, from the sale of five- year Sukuk to become the first Western sovereign to raise Shari’ah compliant financing Modest amount was to test the market appetite and the sale received more than GBP2 billion in orders, reflecting significant appetite for Sukuk of high credit quality Luxembourg Notably expressed interest in issuing Sukuk following the lead established by the UK It passed a law on real-estate transaction in July that allowed for the issuance of Sukuk, which often incorporate real estate assets in to their financing structures for Shari’ah compliance purposes Source: Moody’s

22 Regional Overview (cont’d) 22 Sub-Saharan Region CountryOverview South Africa South Africa has announced plans to go to the market with its first Sukuk transaction in September The planned $500 million issue is from a SPV, the ZAR Sovereign Capital Proprietary Fund Ltd, and has a rating equivalent to the government’s own rating Senegal and Nigeria Gained access to the conventional international bond markets in 2009 and 2011 respectively Senegal issued first international Sub Saharan Africa sovereign Sukuk in July 2014, for CFA100 billion ($208 million) and tenure of four years Nigerian state of Osun issued NGN70 billion ($62 million) Sukuk in Oct 2013, following conventional central government issuances Gambia and Kenya Gambia started in May 2008 to issue weekly Al-Salam treasury bills in local currency with tenors of 3,6 and 12 months Kenya announced the country’s second international bond offering could be accompanied by an Islamic tranche Source: Moody’s

23 THANK YOU Telephone: Fax: Website: Location: 201, Al Masood Building, Al Maktoom Road, Deira, Dubai, UAE Dar Al Sharia Legal and Financial Consultancy


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