The Islamic bond market has seen some improvement in recent months but its overall performance in 2020 will remain weaker than last year, pulled back by a lack of issuance from corporate borrowers and central banks, the global head of Islamic Finance at S&P Global Ratings said.
“More recently, we have observed that there’s a window of opportunity that opened in the market, with investors’ risk appetite improving again,” Mohamed Damak told S&P’s Islamic finance conference held online on Tuesday. “Yet overall, I think the market will be down compared to 2019.”
Although sovereigns, banks and multilateral lenders may issue more sukuk in foreign currencies, corporate borrowers have remained on the sidelines as they try to hold onto cash and reduce capital expenditure to ride out the economic downturn triggered by Covid-19, Mr Damak said.
“Central banks are not issuing either as they are injecting money into the system rather than taking it out,” he added.
The ratings agency in July said sukuk issuance volumes had fallen 27 per cent on an annual basis in the first six months of this year. It expects overall issuance of Islamic bonds to reach around $100 billion (Dh367bn) for 2020, which will be about 40 per cent lower than the $162bn recorded in 2019.
The $2.4 trillion Sharia-compliant finance industry, which grew an annual 11.4 per cent in 2019, will also struggle to maintain the pace of growth in 2020, as core markets grapple with the impact of Covid-19 on their economies, he said.
“The macro picture has shifted with economies going into deep negative territories in core Islamic finance [markets], with the exception of Indonesia,” Mr Damak said. “Central banks have asked banks and financial institutions to support their corporate customers [and at the same time] opened up their [own] liquidity taps … and that has changed the picture completely [for the industry].”
Governments and central banks have poured more than $11tn into the global economy in monetary and fiscal packages to support financial markets and minimise the impact of the pandemic. Nine months after the outbreak, the global economy is showing green shoots of recovery, but the infection rate is still on the rise in Europe, Africa, Asia and the Americas.
However, despite economic headwinds, the long term prospects for the global Islamic finance market are still bright.
Leveraging the sukuk market’s alignment to environment, social and corporate governance (ESG) standards and the development of FinTech could provide catalysts for growth in the post Covid-19 world, Mr Damak said.
—The National
