Indonesia sukuk diverges from Malaysia on oil: Islamic Finance

[KUALA LUMPUR] Indonesian and Malaysian Islamic bonds are diverging as cheaper oil has opposite impacts on fiscal budgets.

The yield on Indonesia's dollar sukuk due 2022 fell to a 21-month low of 3.72 percent in February, while Malaysia's 2021 debt yield climbed to 2.98 per cent, the highest since September, data compiled by Bloomberg show. Default risk for Indonesia has dropped nine basis points this year to 148, while that for Malaysia rose 16 to 122 just as both nations plan US currency global offerings before the Federal Reserve starts raising interest rates.

Barclays Plc forecast a sovereign credit upgrade for Southeast Asia's largest economy after Indonesia freed up US$18 billion when it implemented the biggest ever overhaul of a decades-old fuel-subsidy program last month. Malaysia, the region's only major crude exporter, is contending with a drop in revenue and a higher budget-deficit target, prompting Fitch Ratings to warn of a possible rating downgrade.

"Indonesia's budget position is favorable following the subsidy cut, while cheaper oil has had the opposite impact on Malaysia's budget," Herbie Mohede, fixed-income manager at PT Samuel Aset Manajemen in Jakarta with 2.8 trillion rupiah (US$219 million) in assets, said by phone Tuesday. "All this is bolstering confidence for investors to buy Indonesian credit." Favorable Fundamentals The cost of insuring Indonesia's government debt for five years has declined to the lowest level since Dec 11, CMA prices show. While Malaysia's equivalent increased, it's still at a six-week low.

A rebound in Brent crude prices is probably helping. The commodity has climbed 17 per cent this month to US$62 a barrel, up from a six-year low of US$46.59 on Jan 13. A 45 per cent slump since June prompted Malaysia's government to revise the 2015 budget-deficit goal to 3.2 of gross domestic product from 3 per cent, and lower the economic growth forecast.

Fitch cut the outlook on Malaysia's A- rating, the fourth- lowest investment grade, to negative in 2013. Standard & Poor's and Moody's Investors Service have the same credit assessment but with respective outlooks of stable and positive. Indonesia is rated three levels lower by Moody's and Fitch, while S&P classes it as junk.

The negative outlook indicates Fitch is "more likely than not" to reduce Malaysia's rating as the nation's dependence on commodities remains a key credit weakness, the company said in a Jan 20 statement.

"Malaysia's overall fundamentals are still viewed as more favorable, being rated higher and as implied in the credit swaps market," Winson Phoon, a Kuala Lumpur-based fixed-income analyst at Maybank Investment Bank Bhd, said by e-mail Tuesday. "If the price of oil recovers further it should help Malaysian yields go down a bit, all else being equal," he said.

Indonesian President Joko Widodo implemented a fixed diesel subsidy from Jan. 1 and scrapped those for gasoline. He plans to use the savings to build roads and railways, a measure that may result in a credit upgrade in three to six months, Sandeep Pahwa, Barclays' head of Southeast Asian investment banking, said in a Jan 27 interview in Jakarta.

Indonesia is seeking to return to the global sukuk market in the first half after last selling such debt in September, when it paid a coupon of 4.35 per cent for 10-year notes. Malaysia's sale will be its first since 2011.

It's set to be a bumper year for overseas Islamic bond issuance in dollars from Asia. Malaysia's state-oil company Petroliam Nasional Bhd. is said to be planning a record offering of the notes, which will take the amount outstanding from the region to US$19 billion. Asia sold a combined US$4.3 billion last year, the largest in Bloomberg-compiled data going back to 2010.

Worldwide offerings, which include local-currency sukuk, climbed to US$46.3 billion in 2014, shy of 2012's unprecedented US$46.8 billion, data compiled by Bloomberg show. Sales so far this year total US$1.7 billion.

Malaysian Prime Minister Najib Razak abolished fuel subsidies in December and will implement a 6 per cent goods and services tax in April to bolster revenues.

"Investors may favor Indonesia but most of the positives may have been priced in," Fakrizzaki Ghazali, a credit strategist at RHB Research Institute Sdn. in Kuala Lumpur, a unit of RHB Capital Bhd., said by e-mail Tuesday. "Malaysian yields should stabilize as the government has been seen as proactive."

BLOOMBERG