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Malaysia seen selling Islamic dollar debt as inflows quicken

[KUALA LUMPUR] Malaysia plans to tap the global Islamic bond market for a second consecutive year, joining Indonesia that's planning a sale in March.

Banks have been asked to submit proposals by next week for a benchmark dollar-denominated offer, said people familiar with the offer who asked not to be identified because the process is private. Malaysia sold US$1.5 billion of US currency sukuk in April 2015, its first international bond issuance since 2011. Tengku Sariffuddin Tengku Ahmad, Prime Minister Najib Razak's press secretary, couldn't immediately be reached for comment.

The ringgit is the best-performing emerging-market Asian currency over the past three months as exports have held up and the government managed to keep its budget deficit within target even as oil prices slumped. Standard & Poor's rates the nation at its fourth-lowest investment grade, and foreign funds were net buyers of the country's debt in January after corruption allegations against the prime minister spurred outflows last year.

"We believe there is serious appetite from investors for high-quality issuers out there, and both Malaysia and Indonesia can certainly make that case," said Hasif Murad, an investment manager at Aberdeen Islamic Asset Management Sdn in Kuala Lumpur. "Should the Indonesia sovereign issuance do well, we believe Malaysia could potentially ride on their coat-tails and get a decent yield for this new issue."

A Malaysian 10-year dollar sukuk should yield between 3.3 per cent and 3.6 per cent, Murad said. At last year's sale, the nation issued 10-year notes at 3.04 per cent and 30-year securities at 4.24 per cent. The yield on the debt due 2025 has fallen 44 basis points this year to 3.17 per cent, according to data compiled by Bloomberg. Malaysia has US$1.2 billion of Shariah sovereign dollar bonds maturing in July.

Indonesia plans to offer Shariah-compliant sovereign dollar notes in March, Scenaider Siahaan, director at the Finance Ministry's budget financing and risk management office in Jakarta, said by text message on Tuesday. The nation's dollar sukuk due 2025 yielded 4.68 per cent on Wednesday, down 28 basis points this year.

Worldwide Islamic bond sales are up 17 per cent in 2016 to $2.1 billion from the same period last year, data compiled by Bloomberg show. Issuance dropped 29 per cent in 2015, the most since the global financial crisis in 2008. Malaysian corporate offers have surged 86 per cent this year, while those from the six-member Gulf Cooperation Council fell 50 per cent.

Foreign funds raised their holdings of Malaysian corporate and government debt by 0.8 per cent to RM216.5 billion (US$51 billion) in January, the highest in 11 months. That came after they pared positions by 5 per cent last year amid the allegations against Najib and a 35 per cent drop in Brent crude, which weighed on the net oil exporter's finances. The ringgit has strengthened 4 per cent over the past three months as sentiment toward Malaysia improved, while oil prices have rebounded since mid-January.

"The fact that the Malaysian issuance is for refinancing purposes could inherently provide some captive demand," said Winson Phoon, fixed-income analyst at Maybank Investment Bank Bhd. in Kuala Lumpur. "The recovery in oil prices and the dissipation of negative sentiment toward Malaysia will also help."