The correction in the Global Sukuk Market is here to stay: S&P

Standard & Poor's Rating Services expects issuance to reach $50 billion-$55 billion in 2016, compared with $63.5 billion in 2015 and $116.4 billion in 2014.

Absent its biggest issuer, the global market for sukuk will remain at below-peak levels in 2016, Standard & Poor's  said in a report published on Jan. 6, "The Global Sukuk Market: The Correction Is  Here To Stay."

Standard & Poor's Rating Services 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.

"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 Standard &  Poor'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 Gulf Cooperation Council (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).

In addition, we think that 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.

Over the next few years, we believe the market will benefit from the greater  involvement of traditional stakeholders--such as the Islamic Development Bank  Group, the Islamic Financial Services Board (IFSB), the Accounting and  Auditing Organization for Islamic Financial Institutions (AAOIFI), and the  International Islamic Financial Market (IIFM)--as well as new ones like the  International Monetary Fund (IMF).

"These institutions are now working on several projects to strengthen the  foundations of the Islamic finance industry and prepare it for greater  innovation and accelerated growth," said Mr. Damak.

We have determined, based solely on the developments described herein, that no  rating actions are currently warranted. Only a rating committee may determine  a rating action and, as these developments were not viewed as material to the ratings, neither they nor this report were reviewed by a rating committee.