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3 factors that will shape the sukuk market in 2016

January 2016

January 6, 2015 | 13:45 | Dubai

Three factors, namely, US monetary policy, oil price and the possible lifting of sanctions on Iran, are the three crucial determinants of the sukuk market performance in 2016, according to a top official of Standard & Poor’s (S&P).

“In our view, three main factors will shape the performance of the sukuk market in 2016:  monetary policy developments in the U.S. and Europe, the drop in oil prices, and the possible lifting of sanctions on Iran,” said S&P’s global head of Islamic Finance, Mohamed Damak.

The first two factors are likely to drain liquidity from global and local markets. “We think that if oil prices remain weak, some governments of oil-exporting countries in the GCC and Malaysia may have no other choice than to reduce investment spending, resulting in lower financing needs and potentially lower issuances (conventional and Islamic),” he added. In addition, he said, several issuing countries might decide to go the conventional route, rather the Islamic route, because it is less complex. However, the market could benefit from the European Central Bank’s program of quantitative easing (QE) in a yield-hunting environment pushing some European investors to the sukuk market. Also, if sanctions against Iran are lifted, and the country starts spending more on infrastructure projects, we could see some new growth opportunities there for the sukuk market.

Overall, absent its biggest issuer, the global market for sukuk will remain at below-peak levels in 2016, S&P said in a report. S&P expects issuance to reach $50 billion-$55 billion in 2016, compared with $63.5 billion in 2015 and $116.4 billion in 2014. The correction started last year, mainly because the central bank of Malaysia (Bank Negara Malaysia; BNM)–the largest issuers of sukuk worldwide–stopped issuing. Excluding the BNM effect, sukuk issuance dropped by around 5% in 2015 from 2014.

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