By Liau Y-Sing and Frederik Richter
Analysts see issuances to drop by as much as a fifth in 2010 compared to last year.
Global sukuk issuance will be weaker than expected this year, with some analysts seeing a drop of as much as a fifth from 2009, as Dubai's debt crisis and an expected rise in borrowing costs weigh on sentiment, a Reuters poll showed on Tuesday.
The majority of 12 Islamic bankers and industry experts surveyed expect issuance to range between $15-$17 billion in 2010, down from a similar poll in October which estimated over $20 billion in sales this year.
Global sukuk issuance totalled $19 billion last year, of which the UAE accounted for a fifth, according to Thomson Reuters data.
By comparison, global emerging market issuance totaled close to $200 billion last year, according to Commerzbank, and is likely to match that this year as investors look for more conventional, higher-yielding assets again.
Government borrowing needs and infrastructure funding would drive sukuk sales this year, even if uncertainties over the strength of a global economic recovery and fears of more sukuk defaults dampen the overall market, the poll showed.
"The debt crisis of Dubai World, which became a major issue in the sukuk market in the fourth quarter of 2009, is expected to bring down the issuance size from this region on negative investors' perceptions," said Malaysian Rating Corp vice-president Wan Murezani Wan Mohamad.
"Nevertheless, Dubai World's credit challenges are mostly country-specific and borrower-specific, and as such, should have no demand and ratings implications for sukuk universe in other region."
Sukuk's reputation as a safe haven investment took a hit after Dubai real estate developer Nakheel, issuer of the world's largest Islamic bond, became part of a debt restructuring at some Dubai state-owned companies.
Nakheel said last week it had made a $10.3 million coupon payment on its $750 million bond due 2011.
It has two bonds outstanding -- a 3.6 billion dirham issue maturing on May 13 and the $750 million deal due January 2011.
Ratings agencies downgraded several Dubai-related entities after it became apparent their debt would not be backed by the government as previously assumed.
Bankers also expect issuance to be affected by an expected rise in interest rates as the global economy recovers, which would increase borrowing costs. Islamic bonds are often priced using the conventional LIBOR (London Interbank Offered Rate) as there is no benchmark Islamic rate.
But the return of more normal credit market activity in the Gulf, the need for Islamic financial institutions to refinance and the willingness of governments to increase issuance would support the market, said Simon Eedle, Calyon's Islamic banking global head.
Governments and state-linked firms as well as infrastructure and financial companies are expected to be the largest issuers, with the bulk of paper coming from Malaysia and the Middle East, the poll showed.
Many governments are still intent on maintaining growth-boosting stimulus spending until their economies get back on more solid footing.
The yield on the HSBC/DIFX US Dollar Sukuk Index fell 5.378 to 7.011 on Jan 22 from March last year compared with its Middle East Conventional US Dollar Bond Index, which was down 3.356 during that period.