Two months after the Treasury broadened its funding base through the launch of sovereign rand-denominated sukuk worth R20bn, ratings agency S&P Global Ratings said SA could use the Islamic bond to fund its future just transition requirements.
S&P on Friday said while enthusiasm for the sukuk has been limited in Africa, SA has been one of the few countries that has shown appetite for the debt instrument, which might come in handy in the medium to long term.
“We note that the SA government’s sukuk are eligible for the Reserve Bank’s open market operations, which supports their liquidity. Yet, limited supply hints at a passive investment strategy, at least for now. SA’s most recent sukuk issuance also has a social element that requires mandated banks to abide by the broad-based black economic empowerment (BEE) programme,” said Samira Mensah, lead analyst for financial services ratings at S&P.
“We expect to see more social and sustainability-driven sukuk as authorities incentivise investors to support decarbonisation and sustainability goals. SA could use sukuk to partly finance its 20-year energy transition plan, which will likely require investments of almost $100bn over the next five years.”
The government has put the cost of SA’s just transition at R1.5-trillion over the next five years. SA’s debut five-year sukuk of $500m matured in 2020.
The Treasury indicated in the 2021 budget that it was looking at refining its funding strategy, which has traditionally relied on fixed-rate bonds, inflation-linked bonds and floating-rate notes.
The issue of the sukuk in November, which were rand-denominated, unlike the dollar-denominated Islamic bonds in 2014, was oversubscribed, attracting an array of SA and Islamic banks. However, foreign investors’ involvement in SA’s latest sukuk issuance was limited.
SA, Nigeria and Egypt were the only African sovereigns that issued sukuk in 2023. Egypt is the continents’ largest issuer of sukuk.
“We expect the top three sukuk issuers in Africa — SA, Egypt, and Nigeria — will continue to play a role in Islamic finance. Rated African sovereigns’ sukuk issuance amounts to almost $4.3bn and has accounted for more than two-thirds of Africa’s total issuance of $6.6bn since 2014,” Mensah said.
“The increase in rand-denominated sukuk issuance, which results from tighter external financing conditions, will help the pricing of sukuk that are issued by the private sector. Private sukuk issuance is still nascent, and accounts for about 5% of total sukuk issuance in Africa. Some companies have also issued sustainable sukuk.”
Africa has lagged behind the rest of the world in global sukuk issuance, which came in at $164bn in 2023. S&P expects this to grow to as much as $170bn this year.
Saudi Arabia was the largest region in the sukuk market in 2023.
Mensah said the complexities and evolving Sharia requirements related to sukuk issuance make African states hesitant to use sukuk to fund large infrastructure projects.
“In our view, not all African sovereigns will prioritise sukuk to finance their investment needs. Instead, we believe they will turn to conventional debt markets or concessional financing... Sukuk did not attract significant interest because of their complexity and evolving Sharia requirements,” Mensah said.
“African countries use sukuk to upgrade existing power plants, water stations and dams [SA], or build roads [Nigeria] ... [some] central banks have recognised sukuk as eligible instruments for their open market operations, which means banks can use them as collateral for central bank refinancing.”
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