07/12/2017 11:13 AST

Moody’s says in a new report that the global sukuk market will continue to rebound from a sharp drop in volumes in 2015, supported by rising sovereign issuance, product innovation, increasing demand from retail banks and a narrowing of spreads over conventional bonds. "Sovereigns have underpinned a recovery in the global sukuk market this year, with their issuance increasing by 50% in the first eight months of 2017," says Christian de Guzman, a Moody's vice president -- senior credit officer and one of the report's authors. "We expect sovereign sukuk issuance volumes will continue to grow in 2018 as governments look to diversify their financing mix and satisfy the liquidity needs of Islamic retail banks."

Moody's estimates total sukuk issuance will reach around $95bn by the end of this year, after touching more than $85bn in 2016, including more than $50bn of sukuk issuance by sovereigns. High borrowing needs for GCC sovereigns will continue to support sovereign sukuk issuance through 2018 which Moody's expects to reach around $148bn in terms of volume.

GCC countries drove the market's growth in 2017 with Saudi Arabia raising the lion's share of sukuk during the year to a total of $17bn, or 40% of global long-term sovereign sukuk issued in the first eight months of this year with the trend looking likely to continue over the medium term, driven largely by fiscal deficits caused by ultra-low oil prices. Other countries with large fiscal deficits to tackle, such as Oman and Bahrain -- estimated at 11.9% and 13.4% of GDP in 2017 respectively -- will also contribute to the market's expansion.

Other factors contributing to higher sovereign sukuk issuance include demand from domestic banks, and product innovation. Outside of the GCC, Malaysia continues to lead in sukuk volumes; though in recent months its share has been falling. Nonetheless, it remains the largest sukuk market with an estimated 43% of total sovereign sukuk outstanding in 2016.

On the other hand, Indonesia's share in annual sukuk issuance has increased to 30% in 2016 (from just under 10% in 2010) and will likely grow with the government's efforts to develop the Islamic finance sector.

Although the number of new entrants into the sukuk market has declined since 2014, important debut issues have helped revitalise the overall market. For instance, Nigeria issued its first sukuk this year and a number of sovereigns have indicated that they intend to take advantage of the asset-based nature of sukuk financing to finance their sizeable infrastructure needs, including Niger (unrated), Kenya, Ghana, Morocco, Tunisia and Algeria (unrated).

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