Sovereign sukuk issuance will exceed 2013 levels to reach around US$30 billion by year-end 2014, with the overall outstanding amount to reach $115 billion, according to Moody's Investors Service.
The strong growth momentum in the sovereign sukuk market is expected to be sustained by the plans of both Islamic and non-Islamic governments to tap increased demand for Shari'ah-compliant financial assets and further support their policy goals for Islamic finance
Moreover, demand and liquidity in the market should improve as the sector attracts more global investors.
"The year 2014 has become a landmark year for sovereign sukuk, with the UK issuing its inaugural sukuk, and with Hong Kong and South Africa expecting to conclude sales in September 2014," says Khalid Howladar, Moody's Global Head for Islamic Finance.
All three are major non-Islamic countries, and the transactions indicate a significant change in the potential size, depth and liquidity of this market.
Moody's estimates that total sovereign sukuk outstanding now accounts for more than 36% of the $296 billion of outstanding sukuk as of July 2014.
Moreover, Moody's expects sovereign sukuk issuance will exceed 2013 levels to reach around $30 billion by year-end 2014, with the overall outstanding amount to reach $115 billion. Moody's also forecasts a continued expansion in the number of sukuk-issuing governments into 2015.
Drivers of growth
"Malaysia and more recently Indonesia have been driving the growth in sovereign sukuk with sales in their domestic markets," notes Christian De Guzman, a Moody's Vice President and Senior Analyst.
"Together the two countries account for around two thirds of total sovereign issuance as of July 2014 and the remainder of cross-border/international sukuk were offered by a wide array of sovereigns," he adds.
"Investors' growing comfort with relatively complex Islamic instruments, the increasing financing needs and leverage appetites of some Muslim countries, as well as a desire for stronger investment links with the faster growing economies in the Gulf and Asia are driving this growth," continues Howladar.
Existing capital market hubs - such as London and Hong Kong - are also supporting this growth, so as to ensure their share of the rapidly expanding Islamic financial services industry.
Lastly, Moody's highlights how the growth reflects increasing efforts by the governments of Muslim countries to support Islamic banking and finance in line with the cultural and religious affinity of their native citizens.
Moody's expects many new Islamic and non-Islamic sovereign issuers to continue to enter the market. Since 2001, 16 governments have issued sukuk instruments, motivated by their own financing needs and strategies.
However, in addition to Hong Kong, South Africa and most recently Sharjah, at least eight other governments -- Luxembourg, Morocco, Tunisia, Egypt, Jordan, Oman, Bangladesh and Kenya -- have expressed firm intentions to issue sukuk in the short to medium term.
Countries such as Australia, the Philippines, Russia, Azerbaijan, and South Korea have shown moderate interest in the sector, but are unlikely to issue in the near term.
Moody's also highlights how increased international issuance will continue to attract global investors and improve the depth and breadth of this relatively new sector.
The dollar-pegged economies in the Gulf will drive an increasing proportion of cross-border, hard currency sukuk issuance and attract more global investors. As they become more comfortable with this asset class, it will support their search for yield and portfolio diversification and their increased participation will improve demand and liquidity in the market.