https://arab.news/ykx6v
RIYADH: The liquidity levels of most Fitch-rated sukuk are improving, signaling a gradual stabilization in the Islamic bond market following disruptions caused by the Iran war, according to the credit rating agency.
In its latest report, Fitch Ratings warned that sukuk liquidity has not recovered to pre-Iran war levels in most instances and is likely to remain constrained as long as the conflict persists.
Fitch-rated investment-grade sukuk remains more liquid however, with an average liquidity quantitative assessment score of 66 as of June 9, up from 64 in March and compared to 72 in January.
The outbreak of the war triggered a notable deterioration in the sukuk market liquidity. Heightened investor risk aversion, reduced trading volumes, and broader market volatility led to sharper declines earlier this year.
“Liquidity improvements are not uniform and vary by credit ratings, countries, sectors, currencies, and sensitivity to geopolitical risk. Investment-grade sukuk remain more liquid than speculative-grade, although there has been notable liquidity improvement among sukuk in the ‘B’ rating category. Sovereign sukuk have driven most of the improvement,” said Fitch Ratings.
LQA scores indicate security-level liquidity and range from one to 100, with 100 signifying the highest liquidity.
Speculative-grade sukuk posted an average score of 41 in June, up from 33 in March but below the January level of 48. Sukuk in the B rating category recorded the strongest liquidity improvement between May and June, while sovereign sukuk have driven much of the overall gains.
Stabilizing risk appetite boosting confidence
Commenting on the report, Tony Hallside, CEO of STP Partners, told Arab News: “Liquidity is recovering because risk appetite has stabilized, no default cycle has followed the initial sell-off, and high-quality issuers have continued to attract demand.
“The improvement is clearest in investment-grade paper, particularly sovereign and quasi-sovereign names, where balance sheets, policy support and benchmark status give investors more confidence to trade.”
According to the analysis, sukuk from Hong Kong, Malaysia, and Indonesia, as well as Qatar, Kuwait, Saudi Arabia, and supranationals, maintained the highest liquidity on average.
Fitch, however, added that sukuk from the US, Bahrain, and Ireland, as well as UAE, Kuwait, Egypt and Qatar showed the greatest liquidity improvement in June from March.
“GCC (Gulf Cooperation Council) names should see the cleanest recovery because they sit closest to the original shock but still benefit from deep regional liquidity, strong Islamic bank demand and active institutional buyers,” said Hallside.
He added: “Malaysia and parts of ASEAN (Association of Southeast Asian Nations) are also better insulated through local-currency depth. The weaker end of the market will lag. Speculative-grade sukuk sold off more sharply, and that is where liquidity will take longest to rebuild.”
By sector, asset-backed, supranational and sovereign sukuk maintained the highest liquidity, while sovereign sukuk had the greatest liquidity improvement between May and June.
Market and currency profile
Analysis across all global sukuk outstanding with available data as of June 9 indicates strong liquidity in several key markets. Sukuk in Malaysia, the largest market and responsible for about 60 percent of sukuk by volume, scored above 85.
In Saudi Arabia, more than half of all sukuk by volume scored in the 70–90 range.
Nearly 30 percent of Qatari sukuk issuance by volume scored between 70 and 75, while 92 percent scored above 50.
In the US dollar market, Indonesian dollar sukuk outperform conventional bonds in the highest liquidity brackets, with nearly 40 percent by volume scoring above 80. This share is more than eight times the equivalent for conventional bonds.
Nearly 30 percent of Turkish dollar sukuk by volume score above 70, exceeding the 18 percent share for conventional bonds, although bonds retain greater representation at the very highest liquidity levels.
By currency, Malaysian ringgit-denominated sukuk maintained the highest liquidity in June, with a slight monthly improvement reflecting the depth of the country’s domestic investor base.
Euro sukuk were also highly liquid, followed by UAE dirham sukuk. Liquidity scores for US dollar sukuk, which constitute the bulk of the rated universe, remain below January levels.
About 72 percent of Fitch-rated sukuk have a liquidity score above 50 as of June 9, up from 64 percent on March 23 but still below 81 percent in January.
Future outlook
According to Hallside, liquidity can improve quickly once the conflict premium fades, but market makers and investors will still demand a buffer for regional risk, especially in lower-rated and longer-duration sukuk.
“A full return to pre-war liquidity needs three things: visible de-escalation, a calmer oil market, and a reopened primary market with successful benchmark issuance from high-quality names. If new deals are priced cleanly and secondary spreads tighten without forced concessions, confidence will rebuild,” said Hallside.
He added: “The stronger foundation is that the sukuk market is large, mostly investment grade and still supported by structural demand. Full normalization, however, depends on politics as much as credit fundamentals.”