S&P Global Ratings, a global rating agency, anticipates that the UAE would issue more Sukuk (financial instruments issued through a special purpose vehicle as certificates or notes for Muslims) in local currency in the upcoming years in order to expand local capital markets.
The UAE government issued a Dh1.1 billion Islamic Treasury Sukuk (T-Sukuk) in April, in order to establish a local currency bond market and advance the Islamic economy. The Sukuk were initially issued with tenures of two, three and five, with a 10-year Sukuk following at a later time.
The trading of the T-Sukuk, which are financial certificates, will represent the local return on investment, stimulate economic diversification, and promote financial inclusion.
“We expect to see more such issuance in the next few years as the UAE authorities continue efforts to develop the local capital market,” said Mohamed Damak, primary credit analyst at S&P said, Zawya reported.
The local dirham-denominated Islamic bond market is still in its infancy, so local players are still raising funds by issuing dollar and other foreign currency-denominated Sukuk.
Recently, Abu Dhabi Islamic Bank raised an additional tier-one perpetual Sukuk for USD 750 million. Also, in April, master developer Damac sold a USD 400 million three-year Islamic bond.
As local currency Sukuk issuance drops, S&P predicted that worldwide issuance will total USD160–USD170 billion this year, up from its previous estimate of USD150 billion but it is still slightly below the amount in 2022.
Total issuances in the first half of 2023 decreased 17.5% to USD83.2 billion from USD100.7 billion during the same period in the previous year.
According to Damak, more issuances from Gulf issuers are likely. He noted that they are ‘waiting for the best launch window’ to enter the market.
“We expect to see more traction in the foreign currency Sukuk market in the second half of 2023. Many issuers in the Gulf are on the lookout for opportunities the market may have to offer. They are also seeking to benefit from the current rate situation, under the assumption that central banks are not yet done with inflation and further rate hikes may be on the horizon,” S&P analysts said in the latest note released.