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KFH Research Limited

Sovereign and Quasi-Sovereign issuers drive the global primary sukuk market
in 1Q-2014 KFH Research Limited
According to a newly released report Global Sukuk Report 1Q2014 by Kuwait Finance House Research Limited
(KFHR), the global sukuk market saw a modest volume of USD31.14bln in new sukuk issuances in 1Q2014. This
volume represents a drop of 15.2% as compared to the USD36.73bln in issuances during 4Q13 and 9.82% short
of the USD34.53bln worth of issuances in 1Q13. The drop in issuance volume stems from a noteworthy
slowdown in the GCC sukuk issuances in 1Q14, particularly in the month of March when the only GCC sukuks
issued were the short-term liquidity management sukuks by the Central Bank of Bahrain. The volume of sukuk
issuances in the GCC fell by 12.5% in 1Q14 as compared to the volume in 1Q13. Meanwhile, the
commencement of tapering by the US Federal Reserve in its quantitative easing (QE) programme since J anuary
2014 is another critical factor behind the decline in 1Q14s issuance volume. The US Feds tapering has led to
higher funding costs for issuers, particularly in emerging markets, and this has potentially kept the issuers on hold
to observe the market first.

Consistent with the trend over past several quarters, the primary sukuk market was led by sovereign and quasi-
sovereign issuers who collectively accounted for 81% of the global primary sukuk market issuances in 1Q14.
Notably, the sovereign issuers accounted for 68.6% or USD21.37bln of the total issuances in 1Q14 and this is the
highest absolute volume for the sovereign sector since 3Q12 when sovereign issuers had generated
USD25.66bln in raised proceeds. Meanwhile, the quasi-sovereign sectors share of over USD4.05bln was
spearheaded by nearly USD2.9bln in sukuk issuances by the multilaterals Islamic Development Bank (IDB) and
the International Islamic Liquidity Management Corporation (IILM). In contrast, the corporate sukuk issuances
share in 1Q14 declined to USD5.7bln which represents a 29.8% decrease in comparison to USD8.12bln volume
during 1Q13 and a 57.1% decrease in comparison to the record USD13.29bln volume during 4Q13. Among the
notable jurisdictions issuing sukuk in 1Q14 included Maldives as a debutant issuer in the global sukuk market
with an inaugural 10-year corporate sukuk issuance worth USD3.9mln.

In the secondary market, the global sukuk outstanding portfolio reached USD272.96bln as at 1Q14 which
represents a very modest 1.3% growth from USD269.4bln as at end-2013. The slow growth in 1Q14 was
contributed, in part, by the redemption of a huge USD9.07bln sukuk by the Central Bank of Qatar in J anuary
2014. On the back of this redemption in Qatar, the total GCC sukuk outstanding portfolio in fact declined by 0.4%
to value a little under USD85bln in 1Q14, as compared to the USD85.3bln outstanding as at end-2013. Malaysia
continues to be the largest and only secondary market with over USD100bln in outstanding sukuks. As at 1Q14,
the sukuk outstanding portfolio in Malaysia amounted to approximately USD160.6bln, a 1.5% increase compared
to the USD158.3bln outstanding as at end-2013. In terms of outstanding portfolio growth q-o-q, double digit
growth rates in 1Q14 were recorded in Brunei (47.2%); Singapore (34.3%); Turkey (12.4%); and Saudi Arabia
(10.8%). During the same period, decline in outstanding portfolio were recorded in Qatar (32.1%) and Pakistan

Analysing the yields on sukuk instruments, markets have generally reflected upon the macroeconomic
fundamentals and characteristics of the issuing economies when pricing sukuk instruments. As a result, there has
been a considerable heterogeneity in yields between various jurisdictions in 1Q14. Yields on sukuk instruments in
emerging markets have been affected by the emerging market funds outflow crisis since 22
May 2013, when
the then US Federal Reserve Chairman Ben Bernanke first indicated possibility of a US tapering in its monthly
stimulus program. Notwithstanding this, the yields on sukuks in the two largest sukuk markets of Malaysia and
the GCC have generally eased in 2014 yield-to-date (YTD) on account of robust economic performances in the
backdrop of the US Feds tapering exercise.

As an outlook for 2014, the sovereign sukuk sector is of much stakeholder interest this year as market
participants await the expected debut issuances from the likes of the United Kingdom, Luxembourg, South Africa,
Tunisia, Mauritania, Senegal and Oman. In addition, debut corporate sukuk issuances are also expected this

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KFH Research Limited
year from the likes of Australia, Ireland, Russia and Thailand. The entry of these jurisdictions in the global sukuk
market will expand the total number of jurisdictions that have tapped the sukuk market to date to well over 30
(excluding offshore jurisdictions). As a result, despite the modest primary market momentum in 1Q14, the global
primary sukuk market is expected to once again surpass the USD100bln mark in new sukuk issuances this year
on the back of a healthy pipeline build up.

Sukuk Issuance Trend (2006-1Q14)

Source: Bloomberg, IFIS, Zawya, KFHR

Sukuk Issuance by Issuer Type (q-o-q)

* includes quasi-sovereign papers
Source: Bloomberg, IFIS, Zawya, KFHR

Sukuk Outstanding Trend (2003-1Q14)

Source: Bloomberg, IFIS, Zawya, KFHR

About KFH Research Limited

KFH Research Limited is an award winning, independent Islamic research entity and is owned by Kuwait Finance
House. Its research advisory includes economics, financial and feasibility analysis on new markets and potential
investment ventures in various sectors worldwide. Please visit www.kfhresearch.com for more information.