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Malaysia boosted by Islamic yield drop as Fitch warns on rating

Thursday, March 19, 2015 - 07:13
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Malaysia's long-term Islamic bond yields are falling twice as fast as those on shorter-dated debt, a boost for Prime Minister Najib Razak's ability to fund a US$444 billion development program amid a stubborn fiscal deficit.

[KUALA LUMPUR] Malaysia's long-term Islamic bond yields are falling twice as fast as those on shorter-dated debt, a boost for Prime Minister Najib Razak's ability to fund a US$444 billion development program amid a stubborn fiscal deficit.

Borrowing costs on 15-year local-currency sovereign sukuk dropped 35 basis points from a January peak to 4.31 per cent, while yields on 2017 notes fell 22 basis points to 3.49 per cent, Bank Negara Malaysia indexes show. Malaysia's credit rating is "more than 50 per cent likely" to be downgraded as its trade balance worsens and a state investment company struggles to meet its debt obligations, Fitch Ratings said on Wednesday.

Mr Najib said in October that work will start on highways, railways and similar projects valued at about 75 billion ringgit (S$28 billion) even as the country's currency reserves dropped to the lowest level since 2011. Borrowing costs for companies involved in those ventures could fall further as rising speculation of an interest-rate cut in Malaysia and monetary easing in Europe offset concern that the US will tighten policy, according to RHB Capital Holdings.

"It's a smart move for companies involved in infrastructure development to sell now," Suzaizi Mohd Morshid, Kuala Lumpur-based head of treasury at RHB Islamic Bank, a unit of RHB Capital, said by phone on Tuesday. "Market conditions are conducive for long-term note issuers."

The ringgit has slumped 13 per cent in the past six months, Asia's worst performance, as a halving in Brent crude prices cuts revenue for the region's only major oil exporter. The government raised its 2015 fiscal-deficit target to 3.2 per cent of gross domestic product from 3 percent, just as it's trying to eliminate a shortfall in place since 1998.

The average 15-year sukuk yield rose 28 basis points to 4.66 per cent from Dec 4 to Jan 8 as oil dropped below US$50 a barrel for the first time since 2009 and amid concern that 1Malaysia Development Bhd would default. A US$257 million credit facility given to 1MDB by the government this month and a recovery in crude helped stabilize sentiment, Mr Suzaizi said.

Prasarana Malaysia, the state-owned company that's extending the light-rail network around Kuala Lumpur, sold 2 billion ringgit of Islamic notes Tuesday and got orders for 5 billion ringgit, according to people familiar with the matter.

The company sold three portions of debt, with the 2030 notes paying a coupon of 4.64 per cent, up from the 4.56 per cent at the last sale in 2013. The government issued a debut 15-year sukuk in 2012 at 3.899 per cent as it sought to set a benchmark for enterprises involved in its development plan.

The odds of Malaysia easing policy have increased after surprise interest-rate cuts by Thailand, South Korea, India and South Korea, while futures are showing the Federal Reserve may raise rates by June. The premium for the three-year conventional bond yield over the central bank's 3.25 per cent overnight policy rate shrank to 12 basis points, the lowest since at least 2004.

"The window to sell longer-dated bonds is getting narrower as prospects of the Fed raising interest rates draw near," James Lau, an investment director at Kuala Lumpur-based Pheim Asset Management Asia, who oversees US$300 million, said by phone on Tuesday.

"There's not much room for yields to fall further." Fitch reiterated Wednesday that it may downgrade Malaysia's A- ranking, the fourth-lowest investment grade. The country scores weaker in terms of governance than its peers, head of Asia-Pacific sovereigns Andrew Colquhoun said in an interview in Singapore, citing 1MDB as a case in point. The nation would "sit more naturally in the BBB range," he said, adding that the deteriorating trade balance could tip the current account into a deficit.

Demand for Malaysian debt is holding up as sukuk sales declined 64 per cent to 4.4 billion ringgit so far in 2015, the worst start to a year since 2010, according to data compiled by Bloomberg. Issuance totalled 62 billion ringgit last year and a record 95.8 billion ringgit in 2012.

"Sukuk yields are likely to remain low for the rest of this year given demand from insurers and pension funds," Nik Mukharriz Muhammad, a Kuala Lumpur-based fixed-income analyst at CIMB Investment Bank, said by phone Wednesday. "Even if Fitch were to downgrade Malaysia, the impact won't be significant" because it's been factored in, he said.

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