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[KUALA LUMPUR] A decision by Malaysia's central bank to stop issuing Islamic bonds has slashed the global supply of sukuk but opens the door wider for other borrowers, and may begin to shift the focus of sukuk issuance westwards towards the Gulf.
Malaysia has long accounted for the vast majority of the world's new sukuk sales. But Gulf governments, multilateral institutions and even corporate issuers could now find more room in the market to issue.
"There may be a recovery in sukuk volumes on an overall basis, though it could take some time for other issuers to fill the gap given the unfavourable market conditions," said Fakrizzaki Ghazali, credit strategist at Malaysia's RHB Bank. Low oil prices have slowed the oil-exporting economies of Malaysia and the Gulf.
The Malaysian central bank issued about US$45 billion worth of sukuk last year, most of it ringgit-denominated, accounting for more than a third of total global issuance of US$116.4 billion, Standard & Poor's estimated.
This year, the central bank has halted issuance entirely, almost singlehandedly causing global volumes to shrink 42.5 per cent from a year ago to US$38.6 billion in the first half. S&P projects that if it stays out of the market, global issuance will total just US$50-60 billion this year.
In a statement to Reuters, the Malaysian central bank said"evolving global and domestic liquidity conditions" had caused it to move away from sukuk, which are relatively long-term, and use more shorter-dated instruments to manage liquidity: qard, a type of Islamic loan, and commodity murabaha placements It said there were still plenty of Islamic assets and instruments, including investment sukuk issued by the government, to meet Islamic banks' demand.
S&P said the central bank may also have changed the way it managed liquidity because it felt its sukuk were being snapped up by too broad an array of investors, preventing them from reaching their intended users among banks. As a result, it shifted to offering instruments restricted to banks, S&P said.
Excluding the central bank effect, global issuance dropped only 10.7 per cent in the first half, S&P calculated.
Several classes of issuer may partly fill the gap left by Malaysia's central bank - probably not enough to restore global sales to last year's levels any time soon, but enough for a gradual recovery.
They include two major multilateral bodies, the Jeddah-based Islamic Development Bank and the Malaysia-based International Islamic Liquidity Management Corp. The IDB last month raised the ceiling of its sukuk programme to $25 billion from US$10 billion, as it increased lending across member countries.
Meanwhile, the range of potential sovereign sukuk issuers around the world is expanding as governments seek to tap pools of Islamic funds and develop their Islamic banking industries. Both Jordan and Tunisia are working on debut issues.
The biggest potential new issuers are Gulf governments, which need to cover budget deficits created by cheap oil. So far they have been doing this by running down fiscal reserves, but Saudi Arabia and Kuwait have said they may begin selling debt; Oman's government plans its first sukuk issue this year.
The International Monetary Fund estimates that at current oil prices, Saudi Arabia will run a budget deficit of roughly US$150 billion this year. Even covering a fraction of that with sukuk would mean major new issuance.
The Gulf governments are likely to issue in their own currencies to tap ample liquidity in their banking systems. But they may also choose to issue some international sukuk, to establish a presence in the global debt markets.
Meanwhile, high-rated Malaysian corporates will have plenty of room to issue in the absence of central bank supply. National utility Tenaga Nasional plans to raise as much as RM10 billion via sukuk in what would be the world's largest issue this year.
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