Regional debt issuance boosts Islamic bond take-up

Clodagh Kilcoyne/Reuters

Large Muslim countries accounted for more than half of emerging market debt issuance, both conventional and Islamic, in the first five months of this year.

According to Fitch ratings Saudi Arabia was the largest of the emerging market debt issuers, accounting for a fifth of emerging market debt issuance. Malaysia, Indonesia and Turkey were cited as other large issuers. (China was excluded from the report).

Fitch noted that more than half of all debt issued by Saudi Arabia, Malaysia and Indonesia is in the form of sharia compliant bonds, also known as sukuk. And that sukuk forms a significant proportion of debt instruments in some other emerging market countries.

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The Islamic finance industry has been quick to point out that stronger issuance by these predominantly Muslim countries has given a boost to global sukuk markets, which appear to have stagnated in recent years. 

Global sukuk issuance fell to $108 billion in 2023, compared to $127 billion in 2022 and $129 billion in 2021, according to figures from the Kuwaiti firm Kamco. GCC issuance has been running at around $50 billion to $60 billion in the past five years. 

Saudi Arabia and Malaysia account for about two thirds of all sukuk issued worldwide. The UAE and Turkey have emerged as other important issuers of sukuk, alongside Indonesia, with each country issuing around $10 billion of sukuk each year.

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This year’s increase in debt issuance, both conventional and Islamic, by large Muslim countries is being driven by two factors: rating upgrades that are making certain emerging economies more attractive to some investors, and falling interest rates that are pushing other investors to chase higher yields among lower rated countries. 

Saudi Arabia was upgraded by both Fitch and S&P last year, while Moody’s changed its outlook on the kingdom to positive: a return to AA status, from one or two of the three agencies, looks imminent. Fitch upgraded Qatar to AA in March this year, bringing its rating into line with those already assigned by Moody’s and S&P.

At the other end of the rating scale, Turkey was upgraded by both Fitch and S&P earlier this year, again with Moody’s changing its outlook to positive. Egypt has also benefited from changed rating outlooks following the announcement of huge external investment by Abu Dhabi in March this year. 

Longer term trends are influenced by governments’ budgetary needs and these are supplemented by shorter-term factors related to investor preferences. Governments account for two thirds of Mena bond issuance and two thirds of global sukuk issuance. 

The Egyptian government tapped the sukuk market for the first time in February this year, raising $1.5 billion in three-year instruments. The transaction preceded the positive response to the Abu Dhabi investment and was part of Egypt’s efforts to find new investors willing to finance a government that holds some of the lowest sovereign ratings in emerging markets.

Statistics on sukuk issuance are often hard to analyse and suffer from a general tendency within the sharia-compliant industry to exaggerate the role, either actual or potential, that Islamic financial instruments play within global financial markets. 

Analysis of sukuk trends in emerging markets, as with the breakdown of conventional debt trends, needs to distinguish between sukuk that are aimed at international investors and those destined for the domestic market.

A further distinction needs to be made between sukuk issued in local currency and those issued in dollars or another international currency. 

Only by breaking down sukuk issuance into its various components can one truly understand how it has been changing and how it might develop in the future. 

For example, Saudi Arabia is the biggest global issuer of sukuk, issuing $38 billion last year, double what it sold in conventional bonds. But two thirds of sukuk were sold into the domestic market, according to figures from the Saudi Debt Management Office. 

Malaysia remains the second-largest issuer of sukuk, accounting for up to a third of annual issuance in recent years. The country plays a crucial role in the development of sharia-compliant capital products, but 92 percent of Malaysian sukuk is denominated in local currency and it punches below its weight in international debt capital markets.

Global appetite for emerging market debt is fickle. Hundreds of billions of dollars flow in and out as sentiment changes.

Highly rated issuers such as Saudi Arabia, the UAE and even Malaysia and Indonesia will be able to access funds when they need them, but many factors will determine whether other large Muslim countries, such as Turkey and Egypt are able to raise debt. 

Heavy issuance from large Muslim emerging markets is far from assured for the remainder of 2024. 

Andrew Cunningham writes and consults on risk and governance in Middle East and sharia-compliant banking systems