JEDDAH: Global total Sukuk issuance increased to $27.9 billion in the first nine months of 2010, 62.3 percent higher than the $17.2 billion raised in the same period last year and surpassed full issuance of $24.7 billion in 2009, KFH Research Ltd said in its latest report on the Islamic Sukuk market. Over the years, the Sukuk market has grown by 10 percent to 15 percent annually to reach approximately $100 billion and contributed to 12 percent of the global Islamic finance assets in 2009. The report forecast that the Sukuk market in 2011 would be driven by the recovery made in the global economic activities, flexible monetary policies, and sovereign fund-raising efforts to support economic growth as well as the revival of private sector projects. "Increasing demand and popularity for Shariah-compliant products and structures post the global financial crisis will form a strong demand base for Sukuk," the report noted. Initiatives taken by various jurisdictions in developing legislative and regulatory frameworks, as part of efforts to attract foreign investments, would allow these new players to explore the Sukuk industry for the first time, it added. More sovereign issuers are anticipated to tap the Sukuk market in 2011 as governments will continue to raise funds to support economic growth and fund fiscal deficits, it said. The IMF projects world GDP growth of 4.3 percent for 2011 (2010: 4.6 percent), driven by robust growth in Asia, the Middle East and other emerging markets. This will ensure the revival of infrastructure projects on both the conventional and Islamic capital markets. The report moreover forecast the entry of new players in the emerging markets, as well as new non-Islamic exporters willing to take advantage of Sukuk market with potential debut in Thailand, Japan and Europe, which will boost demand for Sukuk. The report further said as of Nov. 18, 2010, global Sukuk issuance has surpassed earlier full year conservative estimate of $30 billion. Between end-3Q10 to Nov. 18, the market saw a number of high profile international and domestic Sukuk issues. Based on the issuance momentum seen in 2010, the global Sukuk issuance for 2011 is expected to surpass the $34.2 billion peak recorded in 2007, the report noted. In 2009, global Sukuk issuances surged by 58.8 percent y-o-y to $24.7 billion compared to the $15.5 billion raised in 2008. By issuer type, approximately 77.3 percent of fundraisers in the first three-quarters of 2010 were sovereign and quasi-sovereign entities, in line with the general interest of investors which saw a shift in preference to safe-havens and high quality issues. Financial services sector trailed behind at 9.8 percent of total Sukuk issues while power and utilities sector stood at 7.6 percent, driven by financial institutions' fundraising activities and continued infrastructure spending. By country, Malaysia continued to dominate the global Sukuk market, contributed to 72.3 percent of total value of Sukuk issued in 9M10. Indonesia and Saudi Arabia trailed behind at 10.3 percent and 9.1 percent respectively. As such, by currency type, Ringgit-denominated Sukuk deals topped at 63.8 percent, followed by Rupiah-denominated deals at 10.2 percent and Saudi Riyal-denominated deals at 7.4 percent. In the first nine months of 2010, the 10 largest Sukuk deals accounted for $9.52 billion or 34.4 percent of total Sukuk issued globally. Of the $9.52 billion, sovereign issues dominated at $5.84 billion or 61.4 percent of top 10 Sukuk issues, followed by power and utilities at $1.87 billion or 19.6 percent and telecommunication at $1.36 billion or 14.3 percent. By country, Malaysia led with an issuance size of $4.47 billion or 47.0 percent of top 10 Sukuk issues, Saudi Arabia at $2.32 billion or 24.4 percent, Qatar at $1.37 billion or 14.4 percent and Indonesia at $1.35 billion or 14.2 percent. In the first three-quarters of 2010, the largest local currency-denominated Sukuk was a corporate issue from Saudi Arabia (SR7.0 billion or $1.9 billion equivalent) and the largest international US dollar Sukuk was a sovereign issue from the Government of Malaysia ($1.25 billion). Other notable Sukuk deals in 9M10 include a local currency-denominated sovereign issue from the Government of Qatar (QAR5 billion or $1.4 billion equivalent) and SGD-denominated issues from Khazanah Malaysia Berhad via Danga Capital (totaling SGD1.5 billion or $1.1 billion equivalent). In gauging Sukuk performance, according to the HSBC/NASDAQ Dubai US Dollar Sukuk index, which measures the difference between the average yield for Sukuk and the London interbank offered rate (Libor), narrowed by 88.9bps to 378.5bps as of end-September 2010. As of Nov. 18, 2010, Sukuk spread over Libor tightened further to 352.1bps, reflecting stronger demand for Sukuk as investors search for higher yielding assets vs. conventional investment in US Treasuries. According to the HSBC/ NASDAQ Dubai US Dollar Sukuk index, Sukuk fetched an average return of 12.6 percent to investors thus far in 2010, significantly higher compared to US Treasuries average return of between 1.5 percent to 3.0 percent (across varying maturities). However, some challenges currently face the Sukuk market. For instance, the cost for potential Sukuk issuers tends to be more than non-Islamic debt because of the fees paid to Shariah advisory boards, thus putting them at a disadvantage over their conventional counterparts, the report noted. Besides, the demand for and supply of Sukuk is still very much confined to Southeast Asia and the Middle East as international investors are still cautious. This is reflected in the higher yield premium investors demand to hold GCC debt. For example, the extra yield investors demand to hold Dubai's 5-year government Sukuk against Malaysia's 5-year government Sukuk stood at 367bps as of Nov. 15, 2010. Moreover, secondary market liquidity remains a challenge for US$ Sukuk issues as existing Sukuk investors prefer to hold these papers to maturity, and this is especially true for good quality Sukuk issues which are usually rare and difficult to come by, KFH Research said in its report.
