Sukuk demand may hit record levels in 2014, says Fitch

Rating agency sees regional growth, robust gov't spending driving market value to $137bn
Sukuk demand may hit record levels in 2014, says Fitch
By Andy Sambidge
Sat 18 Jan 2014 11:31 AM

Qatar's imminent sukuk issuance of roughly $3bn will kick-start what may be a record year for the sharia-compliant debt market, Fitch Ratings has said in a new report.

The rating agency said regional growth and robust government spending are likely to be partially funded through sukuk programmes in established GCC sukuk markets.

Saudi Arabia and Abu Dhabi's spending plans, Dubai's preparations for the 2020 World Expo and Qatar's plans for the 2022 FIFA World Cup are all likely to boost sukuk issuance either directly by the sovereign or by related entities.

Oman, which has not been a major issuer, has also indicated it will use sukuk to fund infrastructure projects in the next few years.

At the same time, Fitch said strong investor demand is likely to attract debut issues from Islamic and non-Islamic states in 2014.

The push by sovereigns in the region to be become an Islamic finance hub is also likely to spur sukuk issuance, Fitch added.

"We estimate that issuance dropped around 12 percent to $120bn in 2013 due in part to market jitters over US bond purchase tapering," Fitch said.

"However, demand remains strong and we expect this decline to be a blip in the longer-term trend of steady growth, with 2014 issuance likely to be at least in line with 2012's record of $137bn," it added.

Several first-time issuers are likely to enter the market in 2014 including the UK, which plans to debut a £200m sukuk this year.

Luxembourg and Hong Kong have also recently taken steps to introduce new legislation that would allow the issuance of sukuk.

Fitch said although all these issues would be relatively small, they will be a significant step in broadening the range of debt available to investors. Sub-Saharan African sovereigns have also been considering issuance for some time.

As well as the strong demand from investors who will only buy sharia-compliant securities, issuers are likely to be attracted by evidence of increasing market efficiency, the report said.

Fitch said structuring costs have fallen significantly and the time taken to put together a deal has fallen from as much as six months to a few weeks.

The rating agency warned there are still challenges that will limit the attraction of sukuk to many investors and the development of a liquid secondary market, including the lack of a standardised deal structure and the lack of legal precedent over investors' ability to enforce their rights in many jurisdictions.

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