The liquidity levels of most Fitch-rated sukuk have remained close to pre-Iran war levels despite continuous geopolitical tension, the ratings agency noted.
“Liquidity is likely to remain constrained as long as the geopolitical tensions persist. Liquidity improvements vary by credit ratings, countries, sectors, currencies, and sensitivity to geopolitical risk. Investment-grade sukuk have higher liquidity scores than non-investment-grade sukuk,” said Bashar Al Natoor, Fitch’s Global Head of Islamic Finance, and Mohammad Alkhaja, Analyst – Islamic Finance at the ratings agency.
“Fitch assesses liquidity using Bloomberg’s Liquidity Assessment (LQA) scores. The scores indicate security-level liquidity and range from 1 to 100. A score of 100 is assigned to securities with the lowest liquidation costs within an asset class, while securities with the highest costs are assigned a score of 1. LQA is a data-driven model that produces a daily security-specific liquidity surface that captures the relationship between volume, cost, and time. Fitch’s analysis excludes sukuk with local ratings and those without an LQA score,” the duo noted further.
Just over 75% of Fitch-rated sukuk had a liquidity score above 50 on August 4. The percentage has increased from the March 23 tally of 64% but has remained slightly below January’s 81%. The median liquidity score across Fitch-rated sukuk (excluding local ratings) was 64 as of August 4, an improvement from the trough of 55 on March 23, but still below the pre-conflict level of 68.
Fitch-rated investment-grade sukuk had an average liquidity score of 69 on August 4, which is an increase from 64 in March and 72 in January, and is much higher than the 40 for non-investment-grade sukuk, which stayed at 33 in March and 48 in August, and the 40 for non-investment-grade sukuk, which in the same two months stayed at 33 and 48, respectively. Sukuk in the “A” rating category recorded the strongest liquidity improvement between July and August.
Fitch-rated sukuk from Hong Kong, Malaysia, Indonesia, and Egypt, and supranationals, had the highest liquidity scores. Sukuk from Egypt, Oman, Malaysia, and Ireland surpassed their pre-war liquidity scores in August, with Egypt being a notable 11 points above pre-war levels.
As of August 12, liquidity levels varied within the outstanding GCC US dollar markets. Sukuk and bonds in US dollars both had average liquidity scores of around 50.
By currency, Fitch-rated Malaysian ringgit-denominated sukuk had the highest liquidity score in August. The Malaysian ringgit was the only currency to surpass pre-war liquidity levels, reflecting the depth of the Malaysian domestic investor base. Euro-denominated sukuk were also highly liquid, while US dollar-denominated sukuk have been recovering more gradually, nearing pre-war levels in some cases.
“Fitch-rated asset-backed securities are the only sector to have surpassed pre-war liquidity levels. Financial institutions had the second-strongest recovery, followed by sovereigns, supranationals, infrastructure and project finance, and corporates and others. International public finance was the weakest,” the duo concluded.