Issuance of sukuk worldwide is expected to slow down in the third quarter before picking up later in the year on the back of lower interest rates and oil prices, according to Fitch Ratings.

The third-quarter lull will be due to the summer holidays, but the Islamic bond market should see an uptick between October and December, the ratings agency said.

The rebound will also be due to diversification push, refinancing goals, budget deficits and government’s development plans.

Several GCC countries, in particular, have ongoing funding needs, while the anticipated interest rate cuts could also provide momentum for issuance.

“The US Federal Reserve’s expected rate cuts ... could provide issuance impetus,” the ratings agency said.

“Lower oil prices could also drive sukuk.”

Total sukuk issuance reached $91.9 billion during the first half of the year, up slightly from last year’s $91.3 billion, S&P reported earlier.

S&P also said it is maintaining its global sukuk issuance forecast at about $160 billion-$170 billion, following the market’s performance over the first half of the year.

Outlook

There are certain markets, however, that may not show as much activity during the fourth quarter. Qatar and Oman, for example, are deleveraging amid government repayments, while Indonesia and Malaysia are exhibiting fiscal restraint with slower issuances, Fitch noted.

Among Islamic banks, diversification into sukuk will continue, although deposits will remain the key funding source.

“While corporates will likely continue being bank funding reliant, diversification efforts could drive sukuk,” Fitch said.

(Writing by Cleofe Maceda; editing by Seban Scaria)