11/01/2018 10:55 AST

Global Islamic bond, or sukuk, issuance could shrink as much as 28% this year amid tightening liquidity in developed markets from higher interest rates, and rising geopolitical risk in the Middle East, according to S&P Global Ratings (S&P).

Mohamed Damak, S&P’s head of Islamic finance, says total sukuk issuance is likely to decline to around US$70 billion-$80 billion, or 18%-28%, from $97.9 billion in 2017.

Higher interest rates in the US and Gulf Cooperation Council (GCC) countries, and the European Central Bank's plan to scale back asset purchases are expected to reduce demand for sukuk, Mr. Mohamed says in a research report on January 7.

"Overall, we think that liquidity from developed markets channelled to the sukuk market will reduce or become more expensive," he writes.

Rising geopolitical risk in some GCC countries is also likely to hurt demand.

"The continued animosity between Iran and the GCC countries is not helping the investment climate," the report says.

According to S&P data, investors from GCC countries are the largest buyers of sukuk, accounting for 46% of the total outstanding as at end-December.

Meanwhile, slow progress on the standardisation of Islamic finance products will continue to hold the sukuk market back from its full potential, Mr. Mohamed says.

Although some industry players think standardisation for cross-border sukuk is unrealistic, he believes it is achievable.

"It will boost issuance volumes, and restore the attractiveness of the instrument to issuers through a smoother and faster issuance process," he says.

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