Private capital to drive green sukuk issuance

Many supranational organizations may diversify their investment portfolios into renewable energy sector, contributing further to the growth of the green sukuk market

Issuance of green sukuk is expected to accelerate as policies to combat climate change gain traction, building on the initial green sukuk transactions in Malaysia and Indonesia. This comes as the government in both countries seek to promote sustainable policy agendas by attracting private capital into low-carbon and climate-resilient infrastructure projects.

The Malaysian and Indonesian precedents, according to Moody's Investors Service, could encourage other issuers to enter the green sukuk market, particularly the GCC (Gulf Cooperation Council) governments, which aim to diversify their economies away from the oil industry.

Tadau Energy of Malaysia issued the world's first green sukuk in July last year, amounting to 250 million ringgit (US$60.20 million), to fund a solar project, while the Republic of Indonesia, in February this year, became the first sovereign to access the green sukuk market to raise US$1.25 billion.

More recently, BIMB Investment Management, a subsidiary of Bank Islam Malaysia, launched the first ever environmental, social and governance (ESG) sukuk fund, which should also support the demand for green sukuk.

Many supranational organizations in the Middle East and North Africa (MENA) region, including the Islamic Development Bank and Islamic Corporation for the Development of the Private Sector, may also explore ways of diversifying their investment portfolios into renewable energy sector, contributing further to the growth of the green sukuk market.

Overall, sukuk issuance in 2018 is projected to remain broadly stable at around US$90 billion to US$100 billion, following a 17% increase to US$100 billion last year. However, Moody's points out, the final volume may be lower if the large GCC transactions in 2017 are not repeated because rising oil prices have reduced the sovereigns' funding requirements.

The decline in GCC issuance was already manifested in the first half of 2018, falling 32% to US$16.7 billion. Oil price rises have reduced the GCC governments' budget deficits and, hence, their borrowing requirements.

In contrast to the GCC region, the sukuk issuance in Southeast Asia demonstrated a strong momentum in the first half of 2018. Sukuk issuance in Malaysia rose 9% to US$22.4 billion, making it the world's leading issuer with a 41% market share, up from 33% a year earlier.

The increase reflected a surge in corporate issuance across a broad range of sectors, as well as a rise in the volume of short-term Islamic treasury bills issued by the central bank, Bank Negara Malaysia. The Malaysian sovereign is increasingly using domestic Islamic instruments to fund its budget deficit. It remains the largest domestic issuer, with US$6 billion of sukuk launched during the first six months of 2018, although this was down 36% year-on-year.

In Indonesia, Moody's expects the sukuk issuance by Islamic financial institutions and corporates to remain fairly weak. But it expects them to recover somewhat from low levels in 2017, underpinned by a stabilization in the domestic operating environment.

The Indonesian government will remain the country's most active issuer through regular drawdowns under its sukuk medium term note programme. It accounted for around 18% of the global long-term sovereign sukuk issuance in the first half of 2018, up from 12% in the same period of 2017.

Date

7 Sep 2018

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