The shift in sukuk markets in 2015 to date compared to last year is not a cause for alarm, despite the huge amount of attention that it has garnered. The drop, it is true, has been notable particularly in Malaysia which is the largest source of issuance (about two-thirds of issuance comes from Malaysian issuers). However, as Standard & Poor’s notes, a large part of that is the cessation this year of Bank Negara Malaysia’s short-term issuance.
The drop has not been one driven entirely by changes in the financial markets; it was a conscious decision in reaction to foreign banks being the primary user of the central bank’s sukuk to meet their liquidity needs. If these foreign banks buying BNM sukuk were Islamic banks, it is likely that they were GCC-based and thus more exposed to a drop in liquidity since their home economies are more dependent on the oil price for liquidity. However, BNM is central bank of Malaysia, not of the GCC and so it is not in the business of offering liquid securities for GCC banks.
The reporting on the decision to cut the short-term sukuk issuance cite a source saying it “did little to improve liquidity in the domestic financial market” so cuts the issuance volumes should not be interpreted as a cause for alarm in the wider sukuk market. If anything, it just, again, highlight the importance of short-term sukuk for liquidity management at Islamic banks which has been a persistent challenge. Enough of a challenge, presumably, that foreign banks would see value holding MYR-denominated assets for their liquidity needs even as the value of the Ringgit fell (though the liquidity could have been held for a liquidity buffer for other MYR-denominated assets, or had the currency risk hedged).
Most of the year-to-year variability in Malaysia’s sukuk market can be explained by the reduction in short-term BNM sukuk and this is a good thing. There are many factors from the drop in oil prices (which contributes 30-40% to Malaysia’s government budget) and the uncertainty about the contingent liabilities at 1MDB that could be expected to dampen economic activity and as a result sukuk issuance. That this has not happened (in Malaysia at least) should be considered a silver lining.