Liquidity among most Fitch-rated sukuk is edging closer to pre-war levels despite ongoing geopolitical tensions in the Middle East, although the recovery remains uneven, an analysis showed TurkicWorld reports via arabnews.
As of Aug. 4, just over 75 percent of Fitch-rated sukuk had a liquidity score above 50, up from 64 percent on March 23 but still below the 81 percent recorded in January. The median liquidity score stood at 64, up from a March 23 trough of 55 but below the pre-war level of 68, Fitch said in its latest report.
Fitch uses Bloomberg’s Liquidity Assessment scores, which range from 1 to 100, to measure security-level liquidity. A score of 100 reflects the highest liquidity and lowest estimated liquidation costs within an asset class, while 1 indicates the lowest liquidity and highest costs. The agency’s analysis excludes sukuk with local ratings and those without an LQA score.
The latest improvement follows a sharp deterioration in liquidity after the Iran war began. In March, Fitch said liquidity conditions across global sukuk and Gulf Cooperation Council debt capital markets had weakened, with the impact varying according to credit ratings, sovereign risk and sector.
The agency said the short-term effects would depend on the scope and duration of the conflict, while the longer-term outlook would hinge on how quickly investor confidence recovers.
“Liquidity is likely to remain constrained as long as the geopolitical tensions persist. Liquidity improvements vary by credit ratings, countries, sectors, currencies, and sensitivity to geopolitical risk. Investment-grade sukuk have higher liquidity scores than non-investment-grade sukuk,” said Fitch in the latest report.
Investment-grade sukuk outperform
Investment-grade sukuk continued to outperform their non-investment-grade counterparts.
On Aug. 4, Fitch-rated investment-grade sukuk averaged a liquidity score of 69, up from 64 in March but still below the 72 recorded in January. This remained well above the average of 40 for non-investment-grade sukuk, which had stood at 33 in March and 48 in January. Sukuk in the “A” rating category showed the strongest liquidity gains between July and August.
Country and currency profile
Liquidity varied by country and issuer type. Fitch-rated sukuk from Hong Kong, Malaysia, Indonesia and Egypt, along with supranationals, posted the highest scores.
Sukuk from Egypt, Oman, Malaysia and Ireland exceeded their pre-war liquidity levels in August, with Egypt standing out at 11 points above pre-war readings.
In GCC US dollar markets as of Aug. 12, both sukuk and conventional bonds averaged liquidity scores of around 50.
Across all currencies, sukuk were more liquid than bonds, with average scores of 57 versus 53. Excluding US dollar-denominated issues widened the gap further, lifting sukuk to 68 and bonds to 57.
Sukuk outperformed bonds in Oman, Bahrain and Saudi Arabia. Scores were identical in Qatar and the UAE, while Kuwaiti bonds were more liquid than sukuk.
By currency, Malaysian ringgit-denominated sukuk recorded the highest liquidity score in August and were the only ones to surpass pre-war levels, reflecting the depth of Malaysia’s domestic investor base.
Euro-denominated sukuk also remained highly liquid, while US dollar-denominated sukuk recovered more gradually and approached pre-war levels in some cases.
Among sectors, asset-backed securities were the only group to exceed pre-war liquidity levels. Financial institutions showed the second-strongest recovery, followed by sovereigns, supranationals, infrastructure and project finance, and corporates. International public finance lagged the most in its recovery.
