By Elisa Valenta
The sharia bond (Sukuk) market will see a significant drop in issuance this year due to lower oil price and coronavirus pandemic. The mix of two is hurting the Islamic finance countries, which is the main market for Sukuk, says rating agency Standard & Poor’s (S&P) on its recent report. Overall, S&P forecasts there will be about $100 billion of Sukuk issuance this year, or 40% drop than 2019.
During the first quarter of 2020, a total $31.9 billion worth of Sukuk was issued, down 19% from the $39.6 billion issued in the same quarter last year. The pandemic has triggered significant uncertainties in markets, and many jurisdictions are facing an unprecedented combination of challenges, including health issues, economic disruption, severe financial market dislocation, changes in liquidity, and investor sentiment.
Most issuer countries may shift to conventional bonds rather than Sukuk, as there is an increasing risk-aversion among investors. Sukuk issuers will wait for the best window of opportunity to tap the market this year if they have no alternative, such as loans or conventional bonds.
Indonesia as among the top issuers of Sukuk already seen a 50% drop in rupiah denomination issuance in the first quarter of this year compared to 2019. The Indonesian government has been a prominent issuer of the domestic Sukuk market, issuing a total of $335 million to facilitate the liquidity needs of local Islamic banks.
According to the Ministry of Finance, this year, the government initial target for Sukuk issuance was Rp191 trillion. “It [the issuance] will be higher if the pandemic ends faster,” Dwi Irianti, Director of Islamic finance at the Ministry of Finance, tells Forbes Indonesia.
As stated in government regulation in lieu of law No.1/2020, the government has allowed the central bank to bid in non-competitive long-term government bonds and Sukuk in primary auctions without going through intermediaries such as brokers or main dealers until the end of this year.
This is a derivative rule of government regulation in lieu of law No.1/2020 on state financial policy recently introduced by the government to tackle the COVID-19 pandemic crisis.