Crude oil’s rebound to roughly $72 a barrel has done more than pad the ledgers of Gulf state treasuries. It has, according to Moody’s Investors Service, effectively stalled the engine of the global Islamic bond market.
For five straight years, global sukuk issuance grew. That streak is about to break. Moody’s reported on September 7 that 2021 issuance will be flat or slightly lower, landing between $190 billion and $200 billion. That is down from a record $205 billion in 2020.
The culprit is not weak demand. It is oil money. Higher crude prices have eased budget pressures for Gulf Cooperation Council (GCC) governments. When the hole in the budget shrinks, the need to borrow shrinks with it.
Look at the numbers from the first half of 2021. Global issuance rose 3% to $102 billion. That sounds like growth. But that headline number masks a split market. Southeast Asian volumes jumped 22%. Gulf issuance dropped 19%. The two regions are moving in opposite directions.
The drop was brutal in some places. Issuance in the United Arab Emirates and Bahrain fell 65% to just $4 billion in the first half. Moody’s said the decline was steepest among sovereign and quasi-sovereign issuers — the same entities that borrowed heavily during the pandemic. When the emergency passed, they stopped.
Moody’s put it plainly: “Reduced issuance from GCC governments partly offset the stronger activity in the corporate sector.” The corporate side picked up some slack. But not enough. The sovereign retreat was the main factor limiting global growth.
That leaves Southeast Asia carrying the weight. Malaysia and Indonesia drove the 22% increase in their region’s volumes. Moody’s cited their “continued large financial needs” as the reason. These two countries have not had the luxury of an oil windfall. They have kept borrowing to fund infrastructure and social spending.
Malaysia remains the world’s largest sukuk market. It has relied on Islamic bonds to finance its budget deficit for years. That pattern held through the first half of 2021. Indonesia followed the same playbook.
The result is a market that looks fundamentally different than it did a year ago. In 2020, Gulf states and Southeast Asian nations were both issuing heavily as the pandemic cratered revenues everywhere. Now the Gulf has pulled back. Southeast Asia has not.
Brent crude roughly doubled from its March 2020 lows to reach $72. That recovery gave Gulf finance ministries breathing room. They used it to step away from the debt market. The question is whether that breathing room lasts.
If oil prices hold, Gulf issuance could stay low. If they fall, the borrowing spigot could open again. Moody’s report does not predict which way that goes. It simply observes that for now, the oil price effect is real and measurable.
For the sukuk market as a whole, the flat year marks a pause, not a reversal. The corporate sector in the Gulf is still active. Southeast Asia is still growing. The record set in 2020 may be hard to beat, but the market is not shrinking in any fundamental sense. It is just not expanding.
Five years of growth. Then a year of standing still. That is the story Moody’s told on September 7. The cause is not complicated. It is crude.
