Saudi behind increase in foreign currency sukuk deals

Creative Commons/Palácio do Planalto

• Total global issuances forecast to reach $170bn in 2023
• Decline in local currency issuances keeps overall volume down
• Amount of sustainability-linked sukuk increased by 50% this year

Saudi Arabia is driving a surge in foreign currency denominated sukuk deals in the Gulf, with analysts revising up their predictions for 2023.

S&P Global is forecasting total global sukuk issuances of between $160 billion and $170 billion for 2023, up from their initial estimate of $150 billion.

This increase is due in large part to the 9 percent growth in foreign currency issuances for the first half of 2023 compared with 2022, thanks mostly to Saudi Arabia.

Sukuk are Sharia compliant bonds that were developed as an alternative to conventional bonds which are not considered permissible by many Muslims as they pay interest, and also may finance businesses involved in activities not allowed under Sharia law.

A flurry of deals in July have helped to bolster the figures.

Riyadh-based food and beverage firm Saudi Almarai announced on July 19 that it had raised $750 million from a sale of sukuk that drew more than $4 billion in orders.

On the same day, Dubai’s Sobha Realty listed $300 million in sukuk on Nasdaq Dubai.

• Saudi’s Almarai draws $4bn in sukuk orders
• Saudi’s latest sukuk issuance gets $17bn worth of orders
• UAE’s first dirham T-sukuk gets bids worth $2.3bn

“We expect to see more traction in the foreign currency sukuk market in the second half of 2023,” S&P Global said.

“Many issuers in the Gulf are on the lookout for opportunities the market may have to offer.”

Despite the flurry of deals, overall volumes for 2023 are lower than in 2022 because of a decline in local currency issuances.

“Year on year, the market saw a drop of almost 25 percent in the first half of 2023, primarily due to lower issuance by the Saudi Arabian government,” S&P Global said.

Liquidity constraints in the Saudi banking system are thought to be the main reason for the decline, they added. 

Ismail Desai, CEO of Global Islamic Financial Services, an advisory firm in Dubai, explained that regulatory changes may also be hampering sukuk in 2023.

“The local sukuk market has also declined largely due to the introduction of AAOFI (Accounting and Auditing Organization for Islamic Financial Institutions) standards regarding tangibility requirements,” Desai said.

“We expect subdued activity in the short term due to other attractive options to corporates and due to the structural changes brought by stronger and tighter sukuk sharia guidelines.

“In the medium term, we see an increase in activity due to the regulatory push for more localised bond markets and an increasing alignment with sharia governance protocols.

“Unfortunately, many local corporate issuers are now seeking global fixed-income markets to circumvent tighter sharia controls.”

While volumes are lower than last year, S&P highlighted the growing potential of alignment between sukuk issuances and sustainability.

The financial data company said the total volume of sustainability-linked sukuk increased by around 50 percent in the first half of 2023, compared with 2022 – and this year’s Cop28 being held in the UAE “will likely shed more light on how Islamic finance and sukuk might help address the challenges of climate transition”.

Samina Akram, CEO of Samak Ethical Finance in London, told AGBI: “The UAE’s hosting of Cop28 could potentially play a huge role in educating mainstream players on a market which only has 1 percent of the world economy.

“Domestic issuers, both sovereigns and corporations, can use sukuk instruments to tap funding from international markets with large investor bases and allow and attract more foreign investment.”