Sukuk fait accompli and foresight in the time of coronavirus

Fitch Ratings-Dubai-14 April 2020: After witnessing strong market activity during the first two months of 2020, the coronavirus pandemic has put new international sukuk issuance almost at a standstill in March, Fitch Ratings says. The pandemic has triggered major uncertainties in markets and many jurisdictions are facing an unprecedented combination of challenges, including health issues, reduced oil revenues, economic disruption, severe financial market dislocation and changes in liquidity and investor sentiment.

While major uncertainties remain, once the financial landscape has settled and issuers and investors have readjusted, new sukuk issuances are expected to rise, led by high-rated sovereigns funding budget deficits, followed by financial institutions and corporates.

Borrowing needs and fiscal deficits are set to expand in sukuk-issuing countries, like the Gulf Cooperation Council (GCC) countries and Malaysia, which are net oil exporters, due to the oil price fall and the large economic stimulus packages launched to mitigate the coronavirus's fallout. We forecast oil prices to average USD35/bbl (Brent) in 2020 due to oversupply. While sukuk issuers like Indonesia could benefit from lower oil prices as they are net oil importers, the negative effects of lower commodity export prices and reduced tourism revenues will lead to budgetary pressures. The risks to Turkey come mainly from deterioration in global financial conditions. Banks face increased risks to their credit profiles.