[KUALA LUMPUR] Malaysian Prime Minister Najib Razak's efforts to curb the budget deficit and rein in use of debt guarantees will face the judgment of investors next week as a subway financier sells Islamic notes.
Sales of Malaysian government-backed sukuk to fund a US$444 billion development program to build railways, roads and power plants dropped 52 per cent to RM10.5 billion (S$3.43 billion) from 2014's RM22 billion total, data compiled by Bloomberg show.
Issuance will still remain lower after state-owned DanaInfra Nasional Bhd completes a planned RM3 billion offering.
The jury is out on Mr Najib's budget, outlined on Friday, that aims to cut the fiscal shortfall to 3.1 per cent of gross domestic product in 2016 from this year's 3.2 per cent by raising taxes on high-income earners and sustaining growth by expanding infrastructure projects.
Fitch Ratings warned the deficit reduction target will be hard to achieve, highlighting the challenges to finances and the economic outlook from a slump in commodity prices. On the brighter side, it said the potential slippage is unlikely to increase Malaysia's debt ratio.
"We don't see any unaccounted risk to the country's fiscal position as the government has done a good job in lowering the budget shortfall for 2015," said Syhiful Zamri Abdul Azid, chief investment officer at Maybank Islamic Asset Management Sdn, who helps oversees RM17 billion in Kuala Lumpur. "We have been supportive of other DanaInfra sukuk and we will continue to look at them because the credit is as good as the government's."
Fitch predicted the Southeast Asian nation's borrowing will stay around 52 per cent of GDP until 2017.
Bank of America Merrill Lynch economist Chua Hak Bin estimates that figure is closer to 70 per cent when the government-guaranteed securities are included, compared with 54 per cent without them. Public debt totaled RM627.5 billion as of the end of June and state support provided to corporate bonds amounted to RM175.8 billion, said Mr Chua.
Malaysia's ringgit is Asia's worst-performing currency this year as the region's only major net oil exporter suffers from a plunge in Brent crude, which has more than halved from a 2014 peak to US$48.80 a barrel on Thursday.
Mr Najib's 2016 budget assumption of US$48 is conservative, Fitch said and is below the rating company's US$60 projection.
DanaInfra's Islamic bond sale should be welcomed by investors as sukuk issuance in the world's biggest market for the debt fell 35 per cent in 2015 to RM34.2 billion from a year earlier, data compiled by Bloomberg show. That's the worst since 2010. The company plans to sell securities with maturities of seven to 30 years. It issued RM3.5 billion of the notes in April at various tenors with coupon rates of 4.15 per cent to 5.05 per cent.
In Friday's budget, Mr Najib pledged to boost consumption, spur private investment and accelerate selected public infrastructure projects. Southeast Asia's third-biggest economy will expand 4 per cent to 5 per cent in 2016 from as much as 5.5 per cent this year, he announced.
"Concerns over contingent liabilities seem a bit exaggerated in the current context as the country isn't going to go bankrupt anytime soon," said James Lau, a Kuala Lumpur-based investment director at Pheim Asset Management Asia Bhd overseeing US$300 million.
"We would consider buying the DanaInfra sukuk because the funds raised are for capacity building of the country."